Displaying items by tag: inflation

Tuesday, 30 January 2024 03:11

Is It Time to Lock in Yields?

In 2024, the major market narrative has certainly shifted from whether the Fed will cut or hike to when and how much the Fed will cut. According to Steve Laipply, BlackRock’s Global Co-Head of Bond ETFs, it’s a good time to lock in yields. Currently, investors can achieve yields of 4% in low-risk, diversified bond funds which is quite attractive relative to recent history. 

During the previous cycle, investors would have to buy riskier high-yield bonds to achieve such income. Overall, he believes that investors have been overly risk averse during this tightening cycle, and most are underexposed to the asset class. Despite the recent rally, there are plenty of opportunities to capture generous yields with lower levels of risk. Further, fixed income would benefit if the economy weakened further, and inflation continues to lose steam. 

While investors can get even higher yields in the front-end of the curve or with certificates of deposit, Laipply doesn’t see this as a prudent approach given underlying macroeconomic trends, and the Fed’s dovish tilt in the new year. He recommends that investors choose a diversified, broad bond fund like the iShares Core US Aggregate Bond ETF or an active fund like the Blackrock Flexible Income Fund.


Finsum: According to Steve Laipply, Blackrock’s Global Co-head of Bond ETFs, investors should lock in yields given the rising chance of a recession, slowing inflation, and a dovish Fed in 2024.

 

Published in Bonds: Total Market
Sunday, 28 January 2024 04:42

Are Tax-Deferred Annuities Worth It?

The most common reasons to choose a tax-deferred annuity are that it allows for accumulation while also ensuring security. Since taxes are delayed till retirement, there is more compounding to augment returns. Upon retirement, the annuity payouts begin. The downside is that these vehicles can underperform during periods when market returns are robust. Additionally, inflation above historical averages would also erode the purchasing power of annuity payouts. 

 

In contrast to tax-deferred annuities, immediate annuities involve a single lump-sum payment and then payments begin, typically, within a year of purchase. Deferred annuities work differently. After the purchase of the annuity, regular contributions are made. The value of the account grows due to these contributions and earned interest. 

 

Once the deferred annuity buyer is ready for payments, typically during retirement, the annuity seller begins making payments depending on the terms of the annuity and the total amount of funds accumulated in the account. 

 

Ordinarily, earned interest is taxed. This is not the case with a tax-deferred annuity. The result is more compounding and principal growth. However, taxes do have to be paid on income received from the annuity or on the accumulated interest, depending on the structure of the specific annuity. 


Finsum: Tax-deferred annuities offer certain advantages such as more accumulation and security. But there are also some disadvantages such as underperformance vs the broader market and inflation eroding the purchasing power of payouts.

 

Published in Wealth Management

Hazelview Investments shared its bullish outlook for real estate investment trusts (REITs) in 2024. The firm sees gains in the fourth quarter of last year continuing due to earnings strength and relatively low amounts of real estate supply which should support prices. It also sees upside due to attractive valuations, 

 

It does see the economy slowing in the coming year but this should be offset by easing interest rates and the sector’s strong, underlying fundamentals. In addition, Hazelview points out that historically REITs have delivered their strongest performance during the interim period in between the Fed changing course on monetary policy from hikes to cuts. 

 

According to Corrado Russo, managing partner and head of Global Securities at Hazelview Investments, "The shifting tides of economic and monetary conditions, coupled with compelling valuations, create a canvas for strong performance in the REIT market in 2024." 

 

In terms of earnings, the firm sees a 10% increase next year on a cumulative basis. It also anticipates a decline in available supply given that construction has slowed to a crawl over the last 2 years given higher construction and financing costs. At the same time, demand has seen little indication of slowing. 


Finsum: Hazelview Investments is bullish on REITs for 2024 due to attractive valuations, strong underlying fundamentals, double-digit earnings growth, and improving monetary and economic conditions.

 

Published in Eq: Real Estate
Thursday, 25 January 2024 05:36

What to Expect for Fixed Income in 2024

Entering 2023, the consensus was that fixed income would outperform. This turned out to be incorrect as the economy and inflation proved to be more resilient than expected. For the year, the Bloomberg US Aggregate Index returned 5.5% which is in-line with the average return although the bulk of gains came in the final months of the year.  

 

As the calendar turns, the consensus is once again that the Fed is going to be embarking on rate cuts. Currently, the market expects 6 cuts before year-end which means there is room for downside in the event that the Fed doesn’t cut as aggressively. According to Bernstein, this may be premature as the firm sees many reasons for upward pressure on yields including inflation re-igniting, heavy amounts of Treasury debt issuance, and an acceleration of economic growth. 

 

Bernstein recommends that investors eschew more expensive parts of fixed income like high-grade corporate debt. Many are unprepared for a scenario where spreads tighten or rates fall less than expected. Instead, it favors segments that would benefit from stronger growth like preferred securities and AAA collateralized loan obligations (CLOs). The firm also likes TIPS and the 2Y Treasury as these offer attractive yields and inflation protection. 


Finsum: While most of Wall Street is bullish on fixed income in 2024, Bernstein is more cautious due to its expectations that rates will fall less than expected, while valuations are not as attractive. 

 

Published in Bonds: Total Market

A recent report on real estate holdings of institutional investors revealed that while their allocation to the asset class remained level from 2022 to 2023, the allocation in the preceding decade increased by 190 basis points, a jump of 20%.

 

Historical data underscores the potential benefits of private real estate. A whitepaper from TIAA—a respected organization established by Andrew Carnegie in 1918 to support teacher retirements—highlights the performance of private real estate over a two-decade span. From 2000 to 2020, private real estate exhibited a very low correlation with stocks, bonds, and listed REITs. This suggests that incorporating private real estate into a portfolio could enhance diversification, which is crucial for managing risk.

 

Moreover, private real estate has traditionally been an effective hedge against inflation. As inflation erodes the purchasing power of money, the tangible asset class of real estate often sees its value and the income it generates keep pace with or exceed inflation rates, thereby preserving the real value of an investor's income.

 

For financial advisors, the strategic inclusion of private real estate in client portfolios can provide a twofold advantage: diversification benefits and protection against inflation. This can be especially valuable during periods of market volatility and rising prices, helping clients to achieve a more stable and resilient investment outcome.


Finsum: Real estate’s diversification and inflation hedging benefits are among the reasons why institutional investors continue to maintain their increased allocation to the asset class.

 

Published in Eq: Real Estate
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