Displaying items by tag: bear market

Thursday, 11 January 2024 16:41

Energy Weakness Continues Into 2024

2024 has started off with a bearish tone for the energy sector amid concerns of a supply glut and weakening demand. On Monday, crude oil prices dropped 4% as Saudi Arabia reduced prices for Asian customers by $2 per barrel. 

 

This is leading to speculation that Saudi Arabia could be looking to regain market share by punishing US producers and undercut cheaper Iranian and Russian oil. It could lead to a similar situation as 2020 when oil prices collapsed as Saudi Arabia flooded the market to punish other producers. Currently, the US is producing 13.2 million barrels per day of oil and has been restocking inventories and increasing exports. Others see it more as the consequence of a weak demand environment and a reflection of a decelerating economy. 

 

Energy prices had been higher to start the year amid an increase in geopolitical tensions. These include Houthi rebels attacking commercial vessels in the Red Sea and the escalations in the war between Israel and Hamas which could turn it into a larger, regional war. However, these concerns are being dwarfed by the supply and demand picture as evidenced by West Texas crude oil at $70 per barrel. 


Finsum: Oil prices dropped as Saudi Arabia announced that it would be reducing prices for Asian customers. Some believe that the country could be acting to protect market share. 

 

Published in Eq: Energy
Friday, 29 December 2023 03:02

Expect Volatility to Continue for Oil in 2024

This year has seen some big swings in crude oil prices given a variety of developments. These include rising US oil production, OPEC production cuts, the ongoing war in Ukraine, rising tensions in the MIddle East following Hamas’ attack, and a slowing global economy. As a result, crude oil prices ended the year down 10%. 

 

Entering 2024, these will continue to be major themes that need to be monitored. At its last meeting, OPEC reduced its production by 2.2 million barrels per day and said that more cuts may be necessary to support the price. But, there is increasing skepticism whether countries will actually abide given that many are reliant on oil revenue. 

 

Another challenge for OPEC is that US oil production continues to rise. Next year, it’s forecast to be 13.3 million barrels per day, an increase from this year’s average of 13 million barrels per day. Companies like Exxon Mobil and Chevron recently made major acquisitions of domestic producers and are also increasing capital expenditures. Unlike smaller producers, these majors are able to take advantage of economies of scale to push their costs lower and remain profitable with lower prices. 

 

OPEC now only has control of 51% of the crude oil market which is the lowest in decades. This raises the possibility that Saudi Arabia could choose to increase the supply to temporarily crash the price of oil in order to punish these producers and take back market share, although most analysts believe this is unlikely. 

 

On the other side, demand is projected to grow at the smallest rate in a year - 1.3 million barrels per day. In 2023, oil demand increased by 1.8 million barrels per day.  In part, this is due to a slowing global economy especially in China. 


Finsum: Oil has been quite weak to end the year despite several bullish catalysts. In hindsight, the most important development has been rising US oil production which is expected to hit a new record next year. 

 

Published in Eq: Energy
Thursday, 02 November 2023 08:18

Pros and Cons of REITs in a High-Rate Environment

High rates have severely impacted the real estate market. In terms of commercial real estate (CRE), higher rates mean that financing costs have risen, but more pain will come when they have to roll over debt in the coming years, assuming that rates remain elevated. 

 

According to Rich Hill, the Head of Real Estate Strategy & Research at Cohen and Steers, Head of Real Estate Strategy & Research, REITs are in a much better position to handle these stresses than the larger CRE market. 

 

Many REITs have delivered their balance sheets with 86% of debt fixed for around 6 years which means there is much less exposure to interest rates than other CRE operators and investors. Additionally on the aggregate, REITs have a loan to value of 35% which is quite conservative relative to historical standards. 

 

So far, high rates have had a muted impact on earnings, about 1.4%, making it more of a mild headwind. Thus, valuations for REITs have become quite attractive, while they remain on strong footing fundamentally, especially in relation to the broader CRE market. As a result, Hill notes that valuations for REITs have stabilized, while private valuations continue to move lower. 


Finsum: High rates are leading to significant amounts of stress for parts of the commercial real estate market; however REITs have been less affected so far. 

 

Published in Eq: Real Estate
Tuesday, 24 October 2023 15:10

A Regime Change in Portfolio Management

Many investors are hopeful that inflation will continue moving lower which will provide relief for fixed income and equities as the Fed could start loosening monetary policy. However, KKR does not believe it’s likely. Instead, they believe we are in the midst of a ‘regime change’ in terms of the macroeconomic landscape which will require investors to adopt new portfolio management strategies.

 

In essence, they see inflation being structurally higher due to factors such as entrenched fiscal deficits, labor shortages, energy transitions, and increased geopolitical risk. With these conditions, stocks and bonds are more correlated as evidenced by the last 2 years. The firm believes that investors need to increase their allocation to real assets with recurring yields as a source of diversification, given the increase in bond market volatility. 

 

Rather than the traditional real assets such as REITs, TIPs, and precious metals, they find value in real assets that have collateral-based cash flows like private real estate to provide positive returns while dampening portfolio risk. 

 

Even if their outlook on inflation proves to be incorrect, KKR believes that real assets should outperform given that they remain bullish on economic growth and see Q4 and 2024 GDP coming in above expectations. 


Finsum: KKR is bullish on real assets including private real estate as it believes inflation is going to remain structurally high and that bonds are not providing sufficient diversification.

 

Published in Eq: Real Estate

Nuveen believes that real estate is an integral asset for multi-asset portfolios especially during periods of volatility and the recent tight correlation between stocks and bonds. Within real estate, the firm favors private real estate due to attractive yields, diversification, and uncorrelated returns. 

 

According to the firm, private real estate outperforms during bear markets because prices are based on real transactions rather than public markets. This dampens volatility especially during periods of market stress when public equities can go haywire. 

 

In terms of both public and private real estate, Nuveen favors the industrial sector due to expectations of continued growth in e-commerce and investments in logistics near urban locations. Another factor supporting growth is supply chain diversification which is boosting demand for space near ports on the East Coast and the US/Mexico border. 

 

It’s also constructive on healthcare, residential, and self-storage. Within the public REIT space, the gaming sector is in favor due to high dividends and strong cash flows. Another tailwind has been consolidation in the space which is leading to upward pressure on rents. 

 

Nuveen also believes that we are in the final innings of the Fed’s hiking cycle due to inflation moderating which could be a major catalyst for the sector going into next year.


Finsum: Nuveen is bullish on real estate particularly for the industrial, healthcare, and residential sectors. Also, it believes that we are close to the end of the Fed’s hiking cycle. 

 

Published in Eq: Real Estate
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