The global economy has maintained its resilience despite various challenges, including tighter monetary policy, borrowing conditions, and rising geopolitical tensions. The Australian property and investment market continues to track the US, which itself has driven global growth with inflation cooling, leading central banks to cut interest rates or signal easing policies (at least, within the US and Europe; within the Australasian regions, rates appear to be holding steady, with a chance of a rise). However, policymakers remain cautious about potential risks, and upcoming elections in major economies could influence new policy directions. Elevated rates and slower growth forecasts have heightened concerns about budget deficits and fiscal risks. Amidst this complex environment, long-term investors need to stay agile to manage risks and seize emerging opportunities, and LupoToro Group provides diverse perspectives to help navigate these challenges across various asset classes, sectors, and regions.

Real Estate and Property Analysis

2024 has, so far, been a strong case for changing the overall investment narrative and landscape, especially within global real estate and property development markets, including Australia, specifically in the way investment portfolios are constructed in which property and development are core components.

PART I: Key Investment Themes

On the back of easing monetary conditions and improving investment market liquidity, global real estate values are reaching a turning point in 2024. Several key factors give us conviction that global real estate markets are approaching a turning point:

• Looser monetary conditions: As a capital-intensive industry, a reduction in borrowing costs via lower interest rates is set to ease the strain on investors. Conversely, expectations within the Australasian region should be tapered or slightly reversed.

• Historical precedent: Values have started to turn a corner – the pattern is consistent with past cycles, pointing to stabilisation this year and a return to growth in 2025.

• The repricing is nearly done: Based on our modelling, most of the effect of past interest rate increases has now been factored in. Yields are already very close to our target acquisition range.

• Low supply, solid occupier markets: Despite recession risks, occupier strains have been limited by ongoing jobs growth resilience and low development activity. Rental growth remains resilient.

PART II: Portfolio Construction

The signs that the remaining 2024 year, as well as 2025 year to come, should be an attractive prospect for property and development. Our view is that global values will hit a trough in the middle of 2024. Using past downturns and recoveries as a guide, it is optimal for equity investors with longer-term strategies to deploy capital at or even just before the turning point, which reduces the probability of exiting investments in a future downturn. However, the expectation that capital growth will accelerate in an upswing means that strategies with shorter time horizons can expect to deliver their cyclically highest returns between 2025 and 2027. This period will be particularly attractive for value-add strategies focused on shorter-term asset repositioning, for example.

A note of caution though: It’s all about balancing risk and return. While it looks like global values are approaching a turning point, if there is another negative shock, there is a risk of lower returns from deploying today. This speaks to balancing between equity and debt exposure, with the latter offering much stronger protection against these inherent timing risks.

PART III: Key Themes

Evolving market dynamics highlight the ongoing shift from traditional bank lenders to alternative capital sources. Key Themes:

• Regulatory pressures on banks and challenging market conditions limit capacity for new lending.

• Loan maturities create refinancing needs and demands for debt capital.

• Funding gaps emerge across markets and sectors.

• Interest rate reductions will ease valuation pressures, enhancing credit and equity cushions. Any holds or rises will, in local zones, produce conservative opposite movements and thus, results.

• Substantial opportunities for alternative lenders to capitalise on an improving balance of risk-reward.

Asia Pacific is leading the recovery in 2024, along with global logistics markets, and the outlook is for stronger returns ahead across the board from 2025.

• The repricing has a little further to go in some parts of the market, notably in parts where uncertainty about occupier demand is high (e.g., U.S. office, European retail), where there are concerns about supply (e.g., U.S. apartment), and where yields are still very low (e.g., Europe apartment).

• Logistics and industrial markets are most of the way through their correction and are set to record positive returns in 2024 and beyond, while U.S. retail has already seen a big adjustment in relative values and is now benefiting from an improving NOI growth outlook.

• By region, Asia Pacific is leading the recovery partly because yield compression at the back end of the last cycle was more subdued but also because of its strong domestic and regional growth dynamics, which are limiting the need for significant yield adjustment.

• Overall, returns by sector and region are set to even out from 2025 onwards on the back of repricing and supply factors, so local market dynamics are set to play an important role in determining portfolio construction, moving away from the sector-driven model of the last cycle.

PART IV: Supply-Demand Dynamics Support Resilient Income Growth

Supply growth is set to remain below average in the coming years. High construction costs, falling values, and limited debt availability have dampened the supply pipeline significantly. Borrowing constraints are set to hold back deliveries for several more years, even as conditions improve.

The main exception is in logistics markets where supply is still increasing in response to the rapid e-commerce-related demand expansion and rising rents. Office and retail markets are generally seeing low levels of development activity, and U.S. apartment deliveries – elevated in recent years, particularly in Sunbelt markets – are slowing too.

At the same time, demand growth is holding up well, on the back of strong global labor markets that are supporting job creation and household spending, and recently, optimism that economic conditions are starting to improve.

All this means that real estate availability, especially of high-quality, newer space, is set to remain low. As demand stabilizes and then moves into a cyclical upswing, there is the potential for a significant acceleration in rental growth.

PART V: Productivity-Driven Growth Model: Shifting City Rental Dynamics

Technology gains are changing the economic growth model, and the future depends more on productivity, with implications for real estate investment strategy.

Low rents, limited new supply and improving affordability mean that global retail markets have a platform to grow from rising incomes on the back of a productivity boost to spending power. In tourist driven cities, retail and hospitality opportunities are emerging on the back of this trend. In the last cycle, the expansion of jobs helped support economic growth. However, with an aging population and the prospect of a shrinking working-age population in most developed economies, the future depends more on productivity growth on the back of technological advances, including AI. Offices are still facing headwinds from hybrid working so there is a challenging backdrop for investing in the sector. Cities in the United States still have further to adjust, but low supply in CBD areas in Australia, the Asia Pacific and Europe means rental growth is driving targeted opportunities.

This story is playing out around the world, albeit with the United States seeing a smaller shift compared to the last cycle due to its already large technology sector. These forces are affecting local market dynamics, and city growth models differ.

• Productivity-driven cities exhibit higher real rental growth over time, but it is less resilient and more cyclical.

• Employment-driven cities exhibit lower real rental growth over time, but it is more resilient and less cyclical.

Growth strategies should lean toward deploying capital in higher productivity cities, but core funds and credit strategies will need to balance exposure. In 2024, global real estate is at a pivotal moment. With monetary conditions easing and market liquidity improving, there are signs of a turning point. The expected stabilisation and growth in real estate values, coupled with evolving market dynamics, present a compelling case for investment. However, balancing risk and return remains crucial, with careful consideration needed for portfolio construction and timing. As the narrative shifts, opportunities abound, particularly in high-productivity cities and alternative capital sources, setting the stage for resilient, growth-driven investment strategies in the years ahead.

Fixed Income Analysis

We commence with the bond market, which in 2024 has experienced significant fluctuations, driven by alternating waves of pessimism and optimism as economic data and inflation forecasts have swung widely. Early in the year, interest rates rose alongside inflation readings, but they followed the inflation trend lower as the year progressed. Despite these fluctuations, yields remained relatively stable, leading to modest returns on high-quality fixed income. Higher-yielding sectors, like high yield corporates and hard currency emerging markets debt, continued to post positive returns, though at a slower pace than in 2023.

An environment of high and stable long-term rates supports the bullish case for fixed income. However, those seeking a quick drop in yields may find the market disappointing. Even with the likelihood of rate cuts, long-term yields are expected to remain around current levels due to the fair amount of rate cuts already priced in and loose fiscal policy leading to heavy government bond issuance. This scenario likely results in a slow normalisation of the yield curve with little change in long rates despite potential drops in short rates.

PART I: Strategic Value of Bonds

A range-bound rate backdrop may seem uninteresting for a bullish bond thesis, but this stability provides crucial context for asset allocation. Bonds’ relative value shift over the past few years, characterised by the cheapening of bonds compared to stocks, positions them for compelling risk-adjusted returns. Bonds act as solid portfolio shock absorbers, especially if stocks experience a sharp correction while the Federal Reserve is on hold or cutting rates.

The global economy has shown remarkable resilience despite facing tighter monetary policies, borrowing conditions, and rising geopolitical tensions. The US has been a key driver of global growth, with inflation cooling and central banks either cutting interest rates or signaling their intention to do so. However, policymakers remain cautious about risks to the economic outlook. Upcoming elections in major economies like the US, UK, European Union, India, and France could lead to new policy paths. Elevated rates and slower growth forecasts have renewed focus on budget deficits and fiscal risks.

Given the uncertain macro and policy outlook, long-term investors must remain agile to measure risks and seize emerging opportunities. LupoToro Group provides insights to help investors navigate this complex environment and capture diverse opportunities across various asset classes, sectors, and regions.

PART II: Global Sector Outlooks

Regarding developed markets and market rates maintaining a tactical approach is essential as fiscal-related concerns linger and yield curves show signs of re-steepening. Market dynamics may shift as rate differentials apply pressure to certain regions.

• Agency MBS: Agency mortgage-backed securities (MBS) offer a positive short-term outlook due to current valuations, limited supply, and potential domestic bank demand. The recommendation is to underweight production coupons (6% issues and up) due to worsening convexity profiles.

• Securitised Credit: Favouring tranches at or near the top of the capital structure is advisable, given their attractive relative value and risk-adjusted return potential. With spreads at or through historical averages, expect them to remain rangebound, making “carry” the dominant theme throughout 2024. Shorter spread duration investments at/near the top of the capital structure are preferred, while being selective and tactical on more credit-sensitive investments.

• Investment Grade Corporate Bonds: Investment grade (IG) corporate bonds face tight valuations against a backdrop of rising stock prices and relatively low volatility. Spreads are expected to end Q3 modestly wider than current levels, potentially prolonging the attractiveness of current yield levels.

• Global Leveraged Finance: Market technicals remain supportive, with yields elevated but spreads close to fair value. The market is largely in a carry phase, with geopolitical flare-ups potentially providing opportunities to add risk. Active and accurate credit selection will be rewarded.

• Emerging Market Debt: The outlook on emerging market (EM) debt is constructive, particularly for hard currency, but mindful of global election outcomes and policy headwinds. Tactical relative-value positioning is recommended, given the strong US dollar and repricing of Federal Reserve rate-cut expectations.

• Municipal Bonds: Municipal bonds are expected to be supportive and stable, with attractive absolute yields by historical standards. As investor demand continues and supply fades approaching election season, spreads should remain tight. The “higher for longer” interest rate environment and rangebound trading in Treasuries provide supportive technical conditions.

We summarise the above outlooks and asset class views:

• DM Rates: Tactical approach amid fiscal concerns and re-steepening yield curves.

• Agency MBS: Positive short-term outlook with underweights to high production coupons.

• Securitised Credit: Favoring top-of-capital structure tranches with selective credit investments.

• Global IG Corporates: Tight valuations with potential for wider spreads in Q3.

• Global Leveraged Finance: Supportive technicals with active credit selection rewarded.

• EM Debt: Constructive outlook with tactical positioning in local rates and FX.

• Municipal Bonds: Supportive and stable market with tight spreads and attractive yields.

Global political events, including elections in major economies, could significantly influence economic policies and market conditions. Investors should stay informed and prepared for shifts in the geopolitical landscape. The report provides detailed performance metrics for various sectors and asset classes, reflecting the diverse opportunities and risks present in the current market environment.

Elevated interest rates are impacting high debt countries like the U.S., Japan, Italy, and France, while the global economy is transitioning back to traditional constructs with inflation nearing targets and interest rates normalising. This environment positions bonds for competitive risk-adjusted returns, especially during potential stock market corrections. LupoToro Group emphasises high-quality securities and opportunistic investments where market dislocations reveal value opportunities.

The bond market has seen significant fluctuations due to volatile economic data and inflation forecasts, but yields have remained stable, resulting in modest returns for high-quality fixed income and positive returns for higher-yielding sectors. Long-term yields are expected to stay stable due to fiscal policy and government bond issuance. This stability enhances the strategic value of bonds, making them compelling for risk-adjusted returns and portfolio stability. Key sector outlooks include tactical approaches for developed market rates, positive short-term prospects for Agency MBS, favourable securitised credit, and supportive technicals in leveraged finance, among others.

Despite challenges like tighter monetary policies and geopolitical tensions, the global economy shows resilience, with the US driving growth and central banks signalling interest rate cuts. Policymakers remain cautious, with upcoming elections in major economies potentially leading to new policy directions. Elevated rates and slower growth forecasts raise concerns about budget deficits and fiscal risks.

Neo-Asset Push

PART I: Trust in Traditional Financial Institutions

Since the 2008 Global Financial Crisis, trust in governments and financial institutions has significantly declined. Events such as the European Sovereign Debt Crisis, the U.S. Federal Reserve’s response to COVID-19, and the collapse of major U.S. regional banks have exposed the vulnerabilities of relying on centrally controlled institutions. This erosion of trust, coupled with the accelerated impact of technological innovation, has raised questions about the effectiveness of traditional risk-off assets like government bonds and physical gold. Investors are increasingly reassessing these assets’ ability to protect modern portfolios in the face of inconsistent policies and a rapidly evolving economic landscape.

PART II: Bitcoin’s Unique Position as a Risk-Off Asset

Bitcoin presents a paradoxical case as both a risk-on and risk-off asset. This duality is rooted in its revolutionary technology and inherent monetary properties, which blur the traditional distinction between these categories. On one hand, Bitcoin’s rapid growth and price volatility are characteristic of a risk-on asset, attracting speculative investors and fostering significant short-term price swings. On the other hand, Bitcoin’s core attributes—such as decentralisation, absolute scarcity, and the ability to function as a digital bearer asset—embody the characteristics of a risk-off asset, providing financial sovereignty, reducing counterparty risk, and enhancing transparency. Bitcoin operates as the first digital, independent, global, rules-based monetary system in history. Its decentralisation is a fundamental attribute that mitigates the systemic risks associated with traditional financial systems, which rely on centralised intermediaries and human decision-makers to dictate and enforce rules. In contrast, Bitcoin’s network is governed by a global consensus protocol, ensuring that no single entity can control or manipulate the system. This decentralisation shifts the enforcement of monetary policies from manual, private, and opaque processes to automated, public, and transparent mechanisms, thereby enhancing financial sovereignty for its users.

One of Bitcoin’s most compelling features is its absolute scarcity. There will only ever be 21 million bitcoins, a hard cap encoded into the Bitcoin protocol. This scarcity contrasts sharply with traditional fiat currencies, which can be printed in unlimited quantities by central banks, often leading to inflation and devaluation. Bitcoin’s fixed supply makes it an attractive store of value, akin to digital gold. Over the past 15 years, Bitcoin has consistently demonstrated its ability to preserve and increase value, growing to a market capitalisation of over $1 trillion. It has outperformed every other major asset class, delivering annualised returns approaching 60% over the last seven years, highlighting its potential as a hedge against economic uncertainty and inflation.

Bitcoin functions as a digital bearer asset, meaning that ownership and transfer of bitcoin do not require intermediaries. This property significantly reduces counterparty risk, as transactions are direct and peer-to-peer, eliminating the need for trusted third parties such as banks or payment processors. This characteristic enhances Bitcoin’s appeal as a risk-off asset, particularly in a financial landscape where trust in centralised institutions has been eroded by events like the 2008 Global Financial Crisis and subsequent economic disruptions. Bitcoin’s role as a bearer instrument ensures that it can be fully matched by equity and custodied without liability or counterparty risk.

Another key attribute of Bitcoin is its transparency. The Bitcoin network operates on open-source software, meaning that its code is publicly accessible and can be audited by anyone. All transactions are recorded on a public ledger known as the blockchain, providing an unprecedented level of transparency and auditability. This contrasts with traditional financial systems, where transactions are often opaque and subject to manipulation. The transparency inherent in Bitcoin’s design enhances trust and accountability, further solidifying its position as a risk-off asset. Bitcoin’s performance over both short- and long-term horizons has been impressive. Despite its volatility, Bitcoin has scaled to a market capitalisation of over $1 trillion, increasing its purchasing power while maintaining its independence from traditional financial systems. Its low correlation with other asset classes adds a unique diversification benefit to investment portfolios. Recent developments, such as the approval of spot Bitcoin ETFs, the adoption of Bitcoin as legal tender in countries like El Salvador, and corporate treasury allocations by companies like Block, MicroStrategy, and Tesla, underscore its growing acceptance and legitimacy as an asset class. These factors position Bitcoin uniquely relative to traditional risk-off assets, providing a compelling case for its inclusion in modern portfolio construction.

Bitcoin’s volatility, a function of its independent monetary policy, does not undermine its role as a store of value. Unlike modern central banking systems, Bitcoin prioritises the free flow of capital over price stability. As Bitcoin’s network has matured, its price volatility has decreased, highlighting its potential as a capital-preserving asset. Bitcoin’s market cost basis—a more accurate measurement of purchasing power—demonstrates its stability compared to its market price. Additionally, Bitcoin’s low correlation with traditional asset classes makes it a compelling option for portfolio diversification. With the global economy shifting towards digital activity, Bitcoin’s role as a decentralised monetary system is poised to increase, potentially rivalling traditional risk-off assets. Recent developments, such as the approval of spot Bitcoin ETFs, adoption as legal tender in countries like El Salvador, and corporate treasury allocations, further solidify Bitcoin’s position in the global financial landscape. As Bitcoin continues to evolve, it presents a significant opportunity for institutional allocation and portfolio diversification.

Summary of Analysis

As we reach the year’s halfway point, markets continue to focus on and reward companies that are generating above-average growth rates. Profits are growing faster than in the previous year, and the economy has shown resilience despite challenges. While a consumer slowdown is becoming evident, it does not yet indicate acute distress. Strong employment figures and growing wages are likely to support a positive economic backdrop, although gains are expected to moderate over the remainder of the year.

In the information technology sector, fundamentals are being significantly driven by the disruptive opportunities presented by AI and the ongoing digital transformation affecting both consumers and businesses. Mega-cap companies, in particular, are leveraging their substantial resources to stay ahead in innovation and disruption, underscoring the long-term strength of their business models. These companies have shown solid secular revenue and profit trends, as highlighted by their reported earnings in recent quarters. The robustness of these trends suggests continued investment opportunities within the sector.

In respect to Bitcoin we note that it uniquely straddles the line between risk-on and risk-off assets due to its revolutionary technology and inherent monetary properties, such as decentralisation, absolute scarcity, and its function as a digital bearer asset. These features enhance financial sovereignty, reduce counterparty risk, and improve transparency, positioning Bitcoin as a resilient store of value amidst economic uncertainty. Despite its volatility, Bitcoin has consistently outperformed other major asset classes, with annualised returns approaching 60% over the past seven years, and its decentralisation mitigates systemic risks inherent in traditional financial systems. As Bitcoin’s network matures and gains broader acceptance through developments like spot Bitcoin ETFs and corporate treasury allocations, it increasingly rivals traditional risk-off assets, offering unique diversification benefits and solidifying its role in modern portfolio construction.

Investment themes extend beyond technology to include the healthcare, utilities, midstream energy infrastructure, and financial sectors. In healthcare, advancements and innovations continue to provide growth opportunities despite regulatory challenges. Utilities are benefiting from stable demand and the transition to renewable energy sources. The midstream energy infrastructure sector remains critical as it adapts to changing energy dynamics. In the financial sector, solid fundamentals and evolving financial technologies present both challenges and opportunities, emphasising the need for strategic investment approaches across diverse industries.

This information is informative in nature only and does not constitute advice; intended for LupoToro Group’s professional partners, clients and institutional investors; all investments involve risk, including the possible loss of capital.