The past few months have been a disappointing time for investors in South African and other global stock markets. At the time of writing the JSE ALSI has lost 8% in value since the highs reached in April. The Australian (-15.25%) and Brazilian markets (-19.09%) have declined even further from their respective positions from earlier this year.
The main reason for this poor performance by equity markets is the ongoing slowdown of China’s economic growth rate. China is the biggest contributor to the growth of the global economy. Without a strong China the world economy will struggle to expand at its current pace. This is a troubling implication for stocks, specifically the deeply cyclical ones, which need improving growth prospects to perform well.
In an environment where question marks loom about the sustainability of corporate profit growth, there are strong merits for allocating capital towards more defensive assets like listed real estate.
In an environment where question marks loom about the sustainability of corporate profit growth, there are strong merits for allocating capital towards more defensive assets like listed real estate. As discussed below, our view is that the REIT market in the United States is in a particularly sweet spot at the moment:
• The contractual nature of rental income stream provides the investor with more certainty compared to the income stream of a highly cyclical commodity-company like Glencore.
• The strength of its economy bodes well for real estate fundamentals in the US. Unemployment continues to decline and acts as a tailwind for occupancy gains across the real estate market. This bodes well for a continuation of strong rental growth. The favorable economic conditions in the US is in stark contrast to what is currently being experienced locally in South Africa.
• The pullback in stock markets provide good entry levels to invest in US-REITs. Many REITs in the US are trading at stock values that are less than the Net Asset Values observed in private transactional markets. Furthermore, dividend yields of 4% on these REITs were last available to investors in January 2014.
• US multinationals are importing disinflation from the slowdown in global trade. These disinflationary pressures are providing a cap on rising US Treasury yields, which was a previous concern for our thesis on US-REITs.
Positive signals for US-REITS:
*Includes: P/E, P/CF, P/B and Dividend Yield Relative to S&P500. Source: Bank Credit Analyst
The US REIT market has been is in a particularly good space for a while now, but entry levels have earlier not been attractive enough to support a buying spree.
Fortunately, the negative sentiment from nervous investors has spilled over to the share prices of the more defensive REIT sector. This combination of attractive entry points, defensive earnings and strong fundamentals places US-REITs in a particular sweet spot compared to other investment alternatives.
By Wim Prinsloo