Risk assets in recovery. US equity investors spent most of Second Quarter wondering if the various indices would revisit the lows made in February. From a top down perspective, they had plenty of reasons to worry: (i) an activist FOMC, (ii) trade wars all around and (iii) mega-cap tech companies under regulatory threat; however, the balance or risk did seem more favorable within the US than without (political risk in Italy/EU, FX problems/bear markets for a number high profile emerging markets, etc.) and, buoyed by a strong earnings season (and subsequent share buybacks), risk assets saw a rebound in the US with domestically focused stocks (Russell 2000) outperforming companies which derive their revenues from overseas (S&P 500).
Global property securities rebounded from a rough start to 2018 and outperformed the broader equity markets despite continuing to face a number of headwinds in the quarter. Although local currency returns across all three regions were favorable, weaker currencies versus the USD negatively impacted USD returns. Despite worries over the on-going threat of trade wars between the US and its global trading partners and the impact of shifting central bank policies on global interest rates, the global economy has remained resilient thus far. That said, the global expansion has become less synchronized with more variability, and sentiment regarding the outlook for future growth is less certain than at the start of the year. In a world where investors became incrementally more cautious, property securities may have benefitted from some flight to safety given some of their defensive attributes. With the underperformance of recent quarters making valuations more attractive, the combination of continued economic growth, mostly in-line to slightly ahead 1Q earnings and a sprinkling of M&A activity all contributed to lifting property security share prices higher in the quarter. Property securities also benefitted from an interest rate environment that remains supportive of property values despite ongoing worries over rising rates that have thus far been proven to be less severe than expected.