Summer might be over, but markets haven’t cooled down. This week we discuss which industries can rise as rates fall, why global real estate is turning a new leaf, how value-based retailers can shine in every season and how to harvest opportunities in agriculture.
Every Fed cutting cycle comes with a different set of macro and market circumstances, so historical performance is an imperfect guide.
That said, the S&P rises an average of 21% when there’s no recession in the 12-months after the start of Fed cuts. Currently, profits are accelerating, unusual in rate cutting cycles, and Head of U.S. Equity and Quantitative Strategy Savita Subramanian points out that such an environment has consistently favored value. Autos are classic value and Senior U.S. Autos Analyst John Murphy points to cheaper floorplan financing and lower monthly payments for consumers as positives, but 100bp (basis point) in lower rates only drives average loan payments down by $20/month. Homebuilders have outperformed in the 3-months after the first cut in 3 of the last 5 cycles but, ahead of a recession, they typically underperform. Head of Global Loan Strategy Neha Khoda finds that while loan issuers will likely see a sharp decline in tail risk from projected rate cuts, lower-quality high-yield issuers are more sensitive to cashflow growth than rate cuts, and lower rates may not be enough.
Many of the REIT (real estate investment trust) team’s key incremental takeaways from the recent Global Real Estate Conference relate back to this soft-landing, lower rate regime.
150 companies attended from 15 different countries and, generally, those with U.S. consumer exposure saw little evidence of recession with some even seeing improvement in the lower-income consumer. Real estate transactions are finally picking up and this should lead cap rates to compress as the public equities often look attractive versus sale prices. Head of U.S. REIT Research Jeff Spector and team believe public REITs are well-positioned for this uptick in activity given liquidity, access to capital and improving cost of capital. Office remains challenged but there’s been improvement in markets including NYC. Our REIT team still sees senior housing as one of the most compelling opportunities for internal and external growth.
In retail, younger generations prefer the off-price option.
Using proprietary data from the Bank of America Institute, Lorraine Hutchinson recently highlighted key trends for value-based retailers. BofA Institute data showed that value apparel market share increased 8ppt (percentage point) in July 2024 vs July 2019. Spending on value apparel rose 13% over the same period while overall apparel spending rose less than 5%. Additionally, apparel prices have only risen 5% since 2019 (vs. grocery prices +30%), suggesting to Lorraine that consumers are opting for off-price offerings. The customer base is also growing—consumers with the majority of apparel spending in the value tier increased 10%y/y in July compared to a 4% drop in standard and premium tiers. Gen Z and Millennials have contributed to a larger proportion of growth at value stores over the past two years, which companies have highlighted as positive for future growth potential.
The September Global Fund Manager Survey showed that commodity allocations fell to 7-year lows despite improving global sentiment.
Given stretched positioning elsewhere, Chief Investment Strategist Michael Hartnett thinks commodities are a natural contrarian trade. Broad commodity indices have big agriculture weights—e.g., grains & oilseeds account for 23% of the Bloomberg Commodity Index (BCOM). But some agriculture markets have fallen ~50% since 2022 amid global excess supply. For investors looking to learn more, Senior Latin American Food & Beverages and Agribusiness Analyst Isabella Simonato recently published the second Global Agriculture Primer, with nearly 300 exhibits illustrating key sector drivers. Brazil and the U.S. are the global agricultural superpowers, accounting for 21% of total grain production and 53% of oilseed. China is around one-quarter of global grain and oilseed demand and should account for 72% of the total increase in global soybean trade in the next decade. Near-term, the South American harvesting season will be monitored, with the expectation of droughts in Brazil.
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