Author: cvernon

The Global Economic Outlook

In a report published last week, the Organization for Economic Cooperation and Development sharply lowered its global economic growth outlook, pointing to the disruptive impact of ongoing trade tensions. Global GDP is now projected to grow by 2.9% on a year-over-year basis in 2025, down from an estimate of 3.1% in March. The United States economy is expected to grow by 1.6% this year, which represents a sharp downgrade from the March forecast of 2.2% by the OECD. Indeed, out of the countries outlined in this week’s chart, only India saw its 2025 economic growth estimates revised upward in the most recent OECD projections, with forecasts for the euro area and Japan remaining in line with where they stood in March. These assessments underscore the reality of trade disruptions as major drags on global economic momentum. Further, the OECD emphasized in its report that even a complete rollback of tariffs by the U.S. and other nations would not provide an immediate boost to the global economy due to lingering uncertainty about the direction of future policy.

In addition to trade headwinds, the OECD pointed out that domestic factors are compounding U.S. economic challenges, with immigration restrictions and a shrinking federal workforce contributing to weaker growth prospects. Additionally, despite tariff-generated revenues (which hit an all-time high last month), the U.S. budget deficit is expected to widen as slowing economic activity will likely outweigh any fiscal gains from trade barriers. Inflation in the U.S. will also rise in the near term according to OECD forecasters, which could delay substantive monetary easing by the Federal Reserve until at least 2026. The report cautions that this timeline could be pushed even further if inflation expectations become unmoored. Beyond the immediate economic implications of trade disputes, the OECD raised alarm about mounting global fiscal pressures and urged governments to streamline spending and improve revenue collection by expanding their tax bases. Clearly, policymakers around the world have much to evaluate as we prepare to enter the second half of 2025.

Fiduciary Education: Endowments & Foundations

This video is a recording of a live webinar held June 3 by Marquette consultants Stephanie Osten, Linsey Schoemehl Payne, and Mike Piotrowski, CAIA, discussing fiduciary responsibilities and best practices for endowment and foundation nonprofits.

We begin by outlining the fiduciary role, defining the term fiduciary in the context of nonprofit organizations, recognizing who qualifies as a fiduciary, and identifying the key duties and responsibilities of a fiduciary. From there, we describe the investment committee, including its key duties and best practices for both membership and investment program management. Finally, we conclude with general best practices, from recordkeeping to onboarding to governance.

For more information about Marquette’s approach to working with endowment and foundation clients, fiduciary best practices, or any of our presenters, please reach out using the Contact Us page above. Sign up for research alerts to be notified when we publish new videos here.

The Hidden Cost of NOI

Capital expenditure is a crucial yet sometimes underappreciated component in real estate underwriting, as it directly eats into the cash flows available to investors. While a given sector may benefit from certain tailwinds (e.g., demographic shifts, technological adoption, etc.), elevated capital expenditure requirements can materially impair the growth and durability of net operating income. This is particularly relevant in spaces like life science, medical office, and data centers, where structural demand is strong but operational and replacement costs are high.

A clear takeaway from this week’s chart is the connection between GDP-driven sectors and elevated capital expenditure burdens, with both the office and hotel spaces standing out as significantly more capital-intensive than other property types. Specifically, the office sector has suffered sharp valuation declines in recent years, but its capital expenditure challenges were apparent even before that correction. Aging building stock, tenant improvement costs, and escalating obsolescence make net operating income growth difficult within the office space, especially for older assets in secondary markets. This structural drag further complicates recovery prospects for the sector in a post-pandemic, hybrid work environment. On the other end of the spectrum are self-storage assets, with capital expenditure at only 7.7% of net operating income. The low capital intensity, scalability, and operational simplicity of the self-storage space make it one of the most capital-efficient sectors within real estate and especially attractive given the uncertain macroeconomic environment.

In conclusion, while sectors like office or retail may exemplify industry innovation or trend leadership, select opportunities still exist within these spaces. Diligent asset selection that focuses on location, tenant quality, lease structure, and physical upgrades can lead to attractive risk-adjusted returns, even within sectors that exhibit higher levels of capital expenditure. In a yield-starved world, nuanced underwriting and asset-level differentiation remain essential when it comes to extracting value from these spaces.

Land of the Rising Yields

For many years, Japan experimented with ultra-loose monetary policy given long-term economic stagnation and persistent deflationary pressures that plagued the nation. Actions related to this policy included the Bank of Japan pushing interest rates lower, the implementation of yield curve control, and the purchase of more than 50% of all outstanding Japanese government bonds by the central bank. Roughly one year ago, however, the Bank of Japan ended both its yield curve control and negative interest rate policies after achieving sustained inflation and wage growth. Unfortunately, policymakers in Japan face an entirely new set of problems today.

As detailed in this week’s chart, yields on long-term Japanese government bonds have surged in recent days following a weak auction outcome, with the nation’s 30-year bond yield climbing to a record of 3.14%. There are many reasons for this spike, including new trade restrictions that pose a dual challenge to the Japanese economy. On one hand, tariffs diminish the likelihood of near-term interest rate increases by the Bank of Japan, thereby boosting demand for short-term debt. At the same time, trade tensions heighten inflation risks, which undermine investor confidence in long-term bonds. These dynamics present a dilemma for the Bank of Japan as it seeks to scale back its bond buying program and signal potential trouble for Japan’s heavily indebted government. To be clear, rising yields in Japan reflect a broader pattern, as long-term borrowing costs have climbed across major economies given investor concerns over the ability of governments to manage large fiscal deficits. Still, Japan finds itself on particularly precarious footing, and its central bank must now contend with inflationary pressures, weaker sentiment, and demographic headwinds.

What Has Private Equity Done to Small-Cap Stocks?

Private markets have grown exponentially over the last two decades, driven by attractive long-term returns, diversification benefits, and early-stage value creation. As companies stay private longer, much of their initial growth can be realized outside of public markets, which could challenge the small-cap premium and contribute to a shift in the composition of public markets. The following newsletter examines this dynamic and potential impact on small-cap stocks.

The Soybean Shuffle

The most recent headlines related to tariffs have been positive, with the U.S. and China reaching a 90-day pause on May 12 and domestic equities surging in response to this news. Despite this reprieve, however, U.S. farmers may still have reason for concern. To that point, current duties on the second highest U.S. agricultural export, soybeans, remain almost as high as those from 2018, a year that saw U.S. soybeans become a major casualty of another trade conflict triggered by American tariffs on Chinese goods. The U.S. soybean industry was hit hard as a result, suffering an immediate loss of market presence in China. This trend can be observed in the chart above. During a recent hearing before the U.S. Senate Finance Committee, the president of the American Soybean Association expressed fears that current trade restrictions could lead to a loss in market share for U.S soybean farmers similar to that of 2018.

China accounts for roughly 60% of global soybean imports and around half of total U.S. soybean exports, meaning tariffs will almost certainly impact U.S. farmers negatively. Additionally, the Chinese government has endeavored to increase its partnership with Brazil, which is currently China’s largest soybean trading partner. Earlier this month, the leaders of both countries met in Beijing to emphasize the importance of the relationship and sign new trade agreements. Even before this summit, Chinese companies have worked to expand infrastructure within Brazil (e.g., building railroads and water ports) with the goal of bolstering the agriculture supply chain. Additionally, one the largest state-owned conglomerates in China, COFCO, is in the process of building an export terminal in the major Brazilian port city of Santos, which is expected to increase capacity from 5 million tons to 14 million tons. This port is key when it comes to the exporting of commodities such as corn, sugar, and soybeans. It remains to be seen how much stronger the trade relationship between China and Brazil will become in the coming years.

In conclusion, recent tariffs have both redefined international trade relationships and underscored the vulnerability of domestic farmers.  Readers should note that uncertainty surrounding the global macroeconomic landscape is likely to persist, and commodities like soybeans could exhibit elevated levels of volatility amid a reshaping of world trade.

The Great Currency Reversal

As a result of policy uncertainty, shifting sentiment, and a potential U.S. economic slowdown, the dollar has moved lower in 2025, amplifying non-U.S. equity returns for domestic investors this year. This week’s chart outlines this dynamic, highlighting the “return differential” between dollar-based and local currency returns for both developed and emerging market indices. The 8.2% differential for the MSCI EAFE Index, which tracks international developed markets, reflects stronger European currencies (e.g., the euro) that have been fueled by positive growth forecasts and increased defense spending (as noted in “Europe on Defense”). These factors have turned modest equity gains in local terms into significant returns for dollar-based investors. Similarly, Japan has seen a stronger yen in recent months. The MSCI Emerging Markets Index has seen a smaller differential than its developed counterpart this year, but U.S. investors have still benefited from currency effects across several emerging countries. The Brazilian real, for instance, has strengthened in 2025 thanks to a 50 basis point rate hike by the nation’s central bank earlier this month, which has attracted increased capital flows. Taiwan has also seen strengthening of its currency in recent days.

While a weaker U.S. dollar has served as a tailwind for domestic investors in non-U.S. equities, risks related to this trend should be noted. For instance, a weaker U.S. dollar can lead to higher import prices, which can exacerbate inflation and reduce the purchasing power of consumers. A weaker greenback can also discourage foreign investment and serve as a signal of a challenged economic environment. Given the current climate and the currency trends detailed above, it is critical that investors remain diversified across both U.S. and non-U.S. markets to reduce exposure to currency-specific risks and enhance portfolio stability amid global economic fluctuations.

I Want a New Drug

The aging population in the United States has garnered increasing attention over the past two decades, coinciding with the retirement of the Baby Boomer generation and the associated rise in age-related chronic conditions such as arthritis, Alzheimer’s disease, and cancer. As of 2023, over 59 million individuals (17.7% of the U.S. population) were aged 65 or older, and this figure is projected to approach 80 million by 2040.¹ A central challenge associated with this demographic shift is ensuring adequate care, particularly through the effective management of chronic illnesses. One critical avenue for addressing this issue is through investment in the development of efficient and innovative pharmaceutical therapies.

Since 2015, pharmaceutical companies have experienced revenue losses totaling approximately $125 billion due to the expiration of patent exclusivities, with projections indicating nearly double that amount may be lost by 2030. While elevated interest rates and heightened regulatory scrutiny by the Federal Trade Commission contributed to a significant decline in merger and acquisition (M&A) activity in 2022 and 2023, the sector may be well-positioned for a resurgence.² Many drug manufacturers currently maintain robust balance sheets and hold over $180 billion in cash reserves, potentially fueling a new wave of strategic acquisitions.

Realizing a sustained M&A resurgence in research and development will require targeted investment within the biopharmaceutical sector, particularly in early-stage drug development and in the services and technologies that support these endeavors. These include start-ups advancing compact and automated manufacturing technologies, which help mitigate the impact of rising domestic labor costs and offer a competitive edge.

Beginning in the third quarter of 2024 and continuing through the first quarter of 2025, there has been a notable increase in M&A activity. Key transactions include:

  • Johnson & Johnson’s $15 billion acquisition of Intra-Cellular Therapies, focused on central nervous system (CNS) disorders
  • GSK’s $1 billion acquisition of IDRx, a developer of precision oncology therapies
  • AbbVie’s acquisitions of Aliada Therapeutics ($1.4 billion, CNS therapies) and Nimble Therapeutics ($200 million, immune-mediated disease therapies)

Following the first quarter of 2025, newly imposed tariffs have intensified the need for U.S.-based investment, as protectionist trade policies heighten the demand for domestic pharmaceutical production capacity and infrastructure. Couple that with the aforementioned demographic trends in the U.S., we have an investment environment poised for growth.

¹ America’s Health Rankings analysis of U.S. Census Bureau, Single-Race Population Estimates via CDC WONDER Online Database, United Health Foundation.
² Evaluate | Company Profiling search database

Measuring the Impact of Tariffs on Equity Performance

This week’s chart shows two indices created by Morgan Stanley that seek to track the performance of companies with different relationships to the global trade landscape. The first index, called “Tariff Exposed,” represents a group of stocks that are more negatively impacted by tariffs due to supply chains and revenue streams that are global in nature. The second, dubbed “Tariff Insulated,” tracks a basket of firms that are insulated from recent tariffs (or have mitigation strategies related to tariffs in place) due to the nature of their operations. The two indices are global, sector-neutral relative to each other, and include names across the Consumer Cyclical, Consumer Defensive, Industrials, Technology, Health Care, and Basic Materials spaces. Some of the largest constituents of the Tariff Exposed basket are Target, Deere & Co., Dell Technologies, and Intuitive Surgical. Tariffs have served as a headwind for these businesses thanks to their heavy dependence on imports (Target and Dell Technologies) and reliance on export markets (Deere & Co. and Intuitive Surgical). On the other hand, some of the largest constituents of the Tariff Insulated basket are Ulta Beauty, Levi Strauss, Domino’s Pizza, and McDonald’s. These companies have been less impacted by new trade restrictions thanks to localized sourcing of ingredients (Domino’s Pizza and McDonald’s) and diversified supplier bases (Ulta Beauty and Levi Strauss).

Since the start of 2025, the Tariff Exposed and Tariff Insulated indices have returned roughly -14.1% and -0.8%, respectively, as of this writing. Going forward, it is imperative that investors remain diversified across their equity portfolios to ensure exposure to those companies that can weather the tariff-induced storm and those that may be poised to bounce back as trade negotiations progress.

As Real Estate Finds Its Bottom, Alternative Sectors Become More Prominent

Since the onset of the pandemic, the commercial real estate market has experienced significant volatility — first benefiting from a post-pandemic surge, then grappling with a sharp downturn, and now showing signs of stabilization. With the third quarter of 2024 marking the first quarter of positive returns after eight consecutive quarters of losses, the fourth quarter performance added to the case that the asset class has found a floor. This newsletter outlines recent improvements not only across traditional sectors but also an expanding set of alternative property sectors. These alternatives, which include data centers, life sciences facilities, self-storage, and senior housing, reflect the changing composition of institutional real estate portfolios and the growing emphasis on diversification beyond the traditional core sectors. We also explore drivers of demand, specific opportunities in alternative real estate, and value-added real estate.