US Wrap…  SPX: +0.38% NDX: +1.47% INDU -0.25% ESA: -0.09%

US equity markets marched higher with a late rally to close the month of November off in the green. The S&P 500 index delivered its best month in over a year on a $3 trillion surge thanks to a recovery in Big Tech. Software stocks got a boost  from Salesforce, which jumped 9.4% for its best day since March after the company showed progress in cost cuts and gave a better-than-expected profit forecast. US equities have oscillated in a tight range struggling for direction over the past week  as investors weighed a resilient US economy against concern that valuations are stretched. New York Fed President John Williams reiterated the Fed’s benchmark lending rate is at or near its peak level and said monetary policy is “quite restrictive.”

Asia Morning…  HSI -0.75%, NKY -0.04%, SHCOMP -0.52%, ASX -0.20% KOSPI -1.05%

Asian markets kicked off the month of December on the backfoot as concerns about China’s economy persisted, with sentiment cautious ahead of comments from Fed Chair Jay Powell later today. Tech coming under the pump with HS tech index trading -1.82% and Tencent -1.77%. Chinese shares extended their decline with the CSI 300 index set for its lowest close since 2019. Investors remained concerned about the weak economic recovery even as a private survey of China’s manufacturing activity unexpectedly expanded. The decline in home sales also accelerated in November despite more funding support for developers. Stocks in Japan showing some resilience with the Nikkei flat as a stall in yen strength boosted exporters.

Commodity action… Base metal trading firmer with iron ore leading gains in the space trading >1% firmer. Oil steadied after tumbling on Thursday following an OPEC+ meeting that promised further output cuts but was hazy on the details. The alliance announced roughly 900k barrels a day of fresh output cuts from Jan, but the curbs are voluntary, with Angola already rejecting its quota. Saudi Arabia said it will prolong its separate 1 million barrel-a-day reduction through the first quarter. Precious space rebounding after tumbling overnight off the back of USD strength.

Theme of the day… 

The ECB left its benchmark deposit rate unchanged, ending a series of 10 consecutive increases that has taken it from a record low of minus 0.5 per cent last year to an all-time high of 4 per cent in an attempt to tame inflation. Markets are now pricing in a 75 per cent probability of a rate cut by the ECB by April, up from a 30 per cent chance in early October. 

Inflation in the 20-country single currency bloc slowed to 2.9 per cent in October, down from its peak of 10.6 per cent a year earlier. Similar themes are playing out in the UK, albeit possibly at a slower pace, but the interest rate outlook bodes well for the outlook for UK REITS:

Investment Thesis, Valuation and Risks

British Land Investment Thesis

British Land offers diversified exposure to UK (predominantly London) property with a portfolio of offices, retail parks, shopping centres and increasingly urban logistics. The group is embarking on its regeneration of Canada Water – with development now underway. We expect growing macro-economic uncertainty and projections for a recession in the UK will weigh on the outlook for capital values, while sector-wide headwinds around the cost of capital is another issue being faced, although British Land’s balance sheet appears relatively well positioned. 

Derwent London PLC Investment Thesis

We are Overweight Derwent London as we expect extreme supply shortages of prime office space, especially in London’s West End to drive rental growth even in a difficult economy as firms are pushed towards ESG-compliant space and pulled by refocusing space on collaborative and client-facing accommodation in the WFH era. Derwent, in our view, has an excellent investment portfolio and a large, high-quality development pipeline, backed by a strong balance sheet and management team. 

Great Portland Estates Investment Thesis

We are Overweight Great Portland as we expect severe supply shortages of prime London office space, especially in the West End, to support rental growth in almost any economic environment, driven by tenants being pushed into new office space by ESG requirements, as well as re-allocating space to collaborative, client facing environments. Great Portland has the highest committed development spend on London offices as a percentage of assets, a very strong balance sheet and excellent management.