hirun
Market Overview
Equity markets worldwide gained in the second quarter, amid a generally positive outlook for interest rates and investor optimism regarding the impact of artificial intelligence. Markets continued their trend of extreme narrowness during the quarter, as chipmaker Nvidia (NVDA) continued its extraordinary rally. The company, along with Apple (AAPL), drove 65% of the MSCI All Country World Index’s return during the quarter.
Several months of encouraging inflation data revived hopes that the Fed will begin a monetary easing cycle this year. Other economic data were mixed during the quarter, as the US continued to add jobs at a robust pace, but first-quarter GDP came in below expectations, hurt by slower consumer spending. In the eurozone, the European Central Bank (ECB) lowered interest rates for the first time in nearly five years, citing a marked improvement in the eurozone’s inflation outlook as the reason behind its pivot to a less restrictive monetary policy stance. In the UK, the Bank of England (‘BOE’) held its main interest rate steady even as inflation was slowing toward its 2% target, with expectations growing that rate cuts were imminent. However, European stocks came under pressure after far-right parties across several EU countries recorded significant gains in the European Parliament elections.
The conclusion of the first-quarter earnings season painted a mixed picture of how company profits held up in an uncertain macro environment, as US companies generally beat expectations while results in Europe and Japan were more in-line.
Against this backdrop, equity markets in both the developed and developing worlds gained in the second quarter, with the latter outperforming the former. In the US, stocks outperformed, thanks to strong earnings results and optimism that the Fed will retreat from its restrictive monetary policy stance this year. Across the Atlantic, stocks gained but lagged the broader global index due to lukewarm earnings results, concerns that future rate cuts from the ECB will be limited, and political risks. In Japan, stocks declined due to profit-taking in April and a sell-off in June over concerns that the weakening yen may adversely impact the Japanese economy. Meanwhile, in emerging markets, China’s stock market outperformed, thanks to policy support for the country’s beleaguered property sector and signs that the country’s economic outlook was improving.
In fixed income, US government bonds started the quarter weaker but recovered over the last few weeks. After hitting an interim high of 4.74% in April, the yield on benchmark 10-year US Treasury note (US10Y) rallied and closed at 4.40% at quarter end. The real yield derived from inflation-linked bonds showed a similar pattern and closed 23 basis points higher offering attractive 2.11%. In the credit market, risk premia widened in the beginning and close to the end of the quarter but tightened between April and May. All in all, credit spreads widened from the narrow levels of previous months, both for investment-grade and high-yield bonds.
Emerging markets debt bonds were stable in hard currencies, but lost ground in local denominations. The US dollar (USDOLLAR) had a strong quarter in the currency markets, with the US Dollar Index (DXY) gaining 1.3%. In turn, Asian currencies remained under pressure. Both the Japanese yen and the Chinese renminbi weakened over the course of the quarter, depreciating 5.9% and 0.6%, respectively, against the US dollar. In Japan, the weakness was so pronounced that we are now again seeing an increased risk of currency intervention by the Ministry of Finance.
Commodities continued positive returns from the previous quarter. Base and precious metals were the leading sectors, followed by energy. Agriculture and livestock underperformed in the second quarter. For commodities as an asset class, the perception seemed to be that no more rate hikes would create a ceiling for US dollar strength. Commodities continued their steady, albeit somewhat pedestrian, positive performance throughout the quarter. Commodity markets seemed to suggest that even if inflation were to increase, US monetary policy may be more constricted by rising borrowing requirements, driven by increased national public debt that is being financed at much higher interest rates and at debt to GDP levels above 122%.
Portfolio Review
In the quarter that ended 30 June 2024, the Lazard Real Assets Portfolio’s institutional shares (RALIX) and open shares appreciated 0.71% and 0.54%, respectively, outperforming 0.04% gain of the Real Assets Blend Index [1]. (Portfolio performance is measured as a total return and net of fees. All returns, including that of the index, are in US dollar terms.)
The commodities allocation was the top-performing component of the Portfolio, thanks primarily to exposures to silver, gold, zinc, and copper. Silver and gold contributed, with silver prices recording especially strong gains, as investors began to closely monitor the historical gold-to-silver ratio, which pointed to dramatically higher silver prices. Zinc and copper saw a continuation of very low spot smelting charges which is an indication of a shortage of metal concentrate being produced. Agricultural commodities lagged in the period, as better planting and crop conditions resulted in higher supply.
Infrastructure, as measured by the MSCI World Core Infrastructure Index, fell 1.0% in the second quarter. Oil & Gas Storage & Transportation (+4.7%) and Utilities (+1.8%) were the best-performing industries while Transportation Infrastructure and Communications Infrastructure were the worst performing, depreciating 6.8% and 5.1%, respectively. Top contributors in the Portfolio were US-based pipeline operator Targa Resources (TRGP) and UK-based power generator and network operator SSE (OTCPK:SSEZF), which represented 1.8% and 1.1% of the Portfolio, respectively. Top detractors were France-based infrastructure builder Vinci SA (OTCPK:VCISF) and US- based wireless tower operator SBA Communications (SBAC), which represented 1.3% and 1.5% of the Portfolio, respectively.
Real Estate was the laggard as far as benchmark performance goes in the period, underperforming both Commodities and Infrastructure. The MSCI ACWI IMI Core Real Estate Index retreated 1.9%, with performance led primarily by US Multi-Family Apartments and Health Care real estate investment trusts (REITs). Weakest-performing property sectors included Hotel & Resort REITs (-10.5%), Industrial REITs (-7.4%), and Diversified REITs (-5.1%). While we expect continued signs of decelerating inflation and resilient economic activity to favor Real Estate activities and valuation, adjustment surrounding expectations for timing and pace of initial interest rate cuts by the Fed continued to weigh on the sector during much of the quarter. Security-level contributors included US-based senior housing communities operator Ventas (VTR), and US-based property manager AvalonBay Communities (AVB), which represented 1.3% and 1.4% of the total portfolio, respectively. Notable detractors were US-based warehouse operator Prologis (PLD) and US-based data center provider Equinix (EQIX), which represented 1.8% and 1.5% of the Portfolio, respectively.
Outlook
The global central bank hiking cycle of 2022-2023 was unprecedented. After a prolonged pause at peak policy rates in many economies (e.g., nine months in the eurozone and 11 and counting in the US), resumed disinflation has raised hopes of a similar cutting cycle-even if more gradual and to a higher “terminal rate.” To be sure, there have been many twists along this journey and more could be ahead. But the faster a rate cut cycle begins in earnest, the more likely a soft landing-high interest rates and tight credit conditions would have less time to harm a still-resilient economy.
Strong labor markets have been the key to ongoing resilience across a number of major economies. Looking ahead, gradual weakening could reach a tipping point and accelerate. Earlier in the recovery, employer demand for labor far exceeded supply. So far, high interest rates and tight monetary policy appear to have reduced this demand without a significant increase in layoffs, as predicted by Fed Governor Christopher Waller. Now, with employer demand lower, it is possible that any step-up in layoffs might not be absorbed by new hiring and unemployment could become more widespread. Despite still-robust jobs growth, we are carefully looking for any sign of such a dynamic-as recently advocated by Fed Governor Adriana Kugler, among others.
Nonetheless, we remain optimistic that relief from global rate cuts is on the horizon, and that this will be good for both equity and bond markets. While a number of additional risks hang over the outlook for the second half of the year, we are maintaining similar positioning while seeking to avoid potential policy risks that could emerge from the US election.
[1] Me Real Assets Blend Index is an equal weighted blend of the MSCI World Core Infrastructure, MSCI ACW IMI Core Real Estate, and Bloomberg Barclays Commodity Total Return, rebalanced monthly.
|
Important Information Please consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For more complete information about The Lazard Funds, Inc. and current performance, you may obtain a prospectus or summary prospectus by calling 800-823-6300 or going to www.lazardassetmanagement.com. Read the prospectus or summary prospectus carefully before you invest. The prospectus and summary prospectus contain investment objectives, risks, charges, expenses, and other information about the Portfolio and The Lazard Funds that may not be detailed in this document. The Lazard Funds are distributed by Lazard Asset Management Securities LLC. Information and opinions presented have been obtained or derived from sources believed by Lazard Asset Management LLC or its affiliates (“Lazard”) to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change. The performance quoted represents past performance. Past performance does not guarantee future results. The current performance may be lower or higher than the performance data quoted. An investor may obtain performance data current to the most recent month-end online at www.lazardassetmanagement.com. The investment return and principal value of the Portfolio will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. Different share classes may have different returns and different investment minimums. Please click here for standardized returns: https://www.lazardassetmanagement.com/us/en_us/funds/mutual-funds/lazard-real-assets-and-pricing-opportunities– portfolio/F1921/S193/ Allocations and security selection are subject to change. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre-payment risk, also apply. Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including additional costs, competition, regulatory implications, and certain other factors. The performance of investments in real estate and real estate related securities may be determined to a great extent by the current status of the real estate industry in general, or by other factors (such as interest rates and the availability of loan capital) that may affect the real estate industry, even if other industries would not be so affected. The risks related to investments in realty companies include, but are not limited to: adverse changes in general economic and local market conditions; adverse developments in employment; changes in supply or demand for similar or competing properties; unfavorable changes in applicable taxes, governmental regulations, and interest rates; operating or development expenses; and lack of available financing. An investment in REITs may be affected or lost due in part to the fluctuation with the value of the underlying properties of the investment. An investment in REITs may be affected or lost if the REIT fails to comply with applicable laws and regulations, including tax regulations, specifically, the failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended. Exposure to the commodities markets may subject the Portfolio to greater volatility than other types of investments. The values of commodities and commodity-linked derivative instruments are affected by events that may have less impact on the values of equity and fixed income securities. Investments linked to the prices of commodities are considered speculative. Income and gains from commodities or certain commodity-linked derivative instruments do not constitute “qualifying income” to the Portfolio for purposes of qualification as a “regulated investment company” for federal income tax purposes. Without such qualification, the Portfolio could be subject to tax. Derivatives transactions may cause a portfolio to experience losses greater than if the portfolio had not engaged in such transactions. Investments in derivatives are subject to many of the risks of, and can be highly sensitive to changes in the value of, the related security or index. As such, a small commitment to derivatives could potentially have a relatively large impact on a portfolio’s performance. The MSCI All Country World Index (ACWI) is a free-float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The index is unmanaged and has no fees. One cannot invest directly in an index. The Bloomberg Commodity Index (BCOM) is made up of 22 exchange-traded futures on physical commodities, representing 20 commodities which are weighted to account for economic significance and market liquidity. The index is unmanaged and has no fees. One cannot invest directly in an index. The MSCI ACWI IMI Core Real Estate Index is a free float-adjusted market capitalization index that consists of large, mid and small cap stocks across Developed Markets and Emerging Markets countries* engaged in the ownership, development and management of specific core property type real estate. The index excludes companies, such as real estate services and real estate financing companies, that do not own properties. The index is unmanaged and has no fees. One cannot invest directly in an index. The MSCI World Core Infrastructure Index captures large and mid-cap securities across the 23 Developed Markets (‘DM’) countries. The Index is designed to represent the performance of listed companies within the developed markets that are engaged in core industrial infrastructure activities. The index is unmanaged and has no fees. One cannot invest directly in an index. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward- looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.