REITs have languished in 2023 despite a buoyant equity market due to concerns of cascading defaults in certain segments like commercial real estate (CRE), while high rates continue to pose a significant threat to the group. However, the group is beginning to look attractive from a valuation perspective while offering generous dividend income to holders as well.
From a contrarian perspective, there are some silver linings. For one, yields on long-term Treasuries are hitting levels at which they have found resistance before. The biggest, recent headwinds for REITs has been the increase in long-term rates. If this were to reverse, it would be a major catalyst for the group by lowering their financing costs and making their dividends more attractive.
Additionally despite the challenging operating environment, financials continue to be sound, outside of CRE, and dividends continue to be hiked. According to research, REIT stock prices tend to follow their dividend streams over long periods of time. So far, there is no evidence that dividend payouts will be compromised which increases conviction in buying the dip.
To reduce risk, investors should focus on areas where rents continue to increase such as healthcare and industrials in contrast to areas where rents are slowing or stagnating such as multifamily real estate and office properties.
Finsum: REITs have been one of the worst performers over the last 2 years. Here is a contrarian perspective on why the sector could outperform in 2024.
Exxon Mobil recently shared its long-term outlook on how it sees the global energy market evolving. Overall, it sees renewables taking a greater share but that more than half of the world’s energy needs will continue to be met by oil & gas.
It sees energy demand as being intrinsically tied with economic development. By 2050, more than 1.5 billion people will have entered the global middle class which comes with increased consumption of automobiles, air conditioners, refrigerators, etc.
China’s per-capita energy consumption more than pentupled as the country experienced an economic boom. The company sees a similar possibility in Africa over the next couple of decades. In total, it sees global electricity consumption growing by 80% by 2050.
In order to facilitate this, it believes that all types of energy need to play a role including oil & gas. Despite the belief of many that EVs portend a peak in oil demand, ExxonMobil points out that even if every car sold in 2035 is an EV, global oil demand would only drop to 85 million barrels per day which is equivalent to 2010 levels.
Finsum: ExxonMobil shared its outlook for the global energy market till 2050. Overall, the company believes that energy demand will continue rising and that oil & gas will remain integral for the global economy.
For Bloomberg, Ye Xie covers the aftermath of a disastrous Treasury auction for buyers. A little less than 3 and a half years ago, the world and fixed income markets were in a much different place due to the pandemic and the Fed’s aggressive efforts to flood the market with liquidity. At the time, the 30-year Treasury was auctioned off at a yield of 1.2%, while it now fetches nearly 4.5%.
Thus, buyers of the 30Y have taken a huge loss. In recent weeks, it’s traded around fifty cents on the dollar. Typically, this would mean that holders are concerned about default risk, but this is not the case. Instead, the price is so low because buyers have to be sufficiently compensated given that they can get higher levels of income in so many places.
Simply put, it’s an indication that these buyers essentially top-ticked the Treasury market. Longer-term Treasuries declined by nearly 30% in 2022 and have added to these losses this year as the Fed has remained hawkish for longer than expected. The holders of this specific note include the Fed, ETFs, pensions, and insurance companies.
Finsum: The yield on the 30 year Treasury fell as low as 0.7% during the depths of the pandemic. Now, they are close to 4.5%.
Demand for active fixed income has materially increased in 2023 due to a combination of secular and cyclical factors. Adoption is up due to institutions and advisors becoming more familiar with the new category, while recent data supports the notion that it can outperform passive at least in specific circumstances. From a cyclical perspective, higher rates and increased volatility are also leading to more demand for active fixed income products as managers have more latitude in terms of duration and credit risk.
AllianceBernstein recommends a systematic approach to fixed income in order to outperform benchmarks. It sorts through criteria to identify predictive factors which goes deeper than the traditional approach of duration, beta, and sector.
This criteria includes value, momentum, fundamentals, company financials, and historical market data. Many factors are only applied during specific market regimes when they have greater predictive power.
This strategy allows for increased diversification as returns are uncorrelated from benchmarks and other factors. They also typically have lower costs while allowing for greater customization to fit client needs. This sort of quantitative, factor-based investing is more prevalent in equities, but the company is looking to bring it to fixed income.
Finsum: AllianceBernstein recommends a systematic, quantitative approach when it comes to active fixed income. The key ingredient is dynamic weighing of quantitative factors.
Over the last decades, there has been a constant trend in equities trading towards lower transaction costs, increased transparency, fractionalization which have made the markets cheaper and more accessible for everyone. This is only beginning to happen in bond markets where the majority of trading still takes place over the counter.
One startup, Moment, is taking on the challenge as it’s raising $17 million in a Series A round led by Andreessen Horowitz. It’s expected to be a major opportunity especially as interest in trading bonds has increased amid the spike in rates since last year.
Currently, the major electronic venues for trading bonds are MarketAxess and Tradeweb. Moment’s API seeks to pull data from all these fragmented markets and liquidity pools and provides execution services in addition to analytics and portfolio management tools. The company plans to cover all types of fixed income investments including municipal bonds, Treasuries, and corporate debt.
The company believes it will be able to be the premier platform for retail investors when it comes to fixed income trading. It sees upside opportunity in that only 3% of US households own individual bonds, while 23% of households own individual equities.
Finsum: Interest and activity in fixed income has soared along with rates. Moment, a startup backed by Andreesen Horowitz, is looking to build a platform for retail trading of bonds.