Displaying items by tag: bear market

A perplexing situation is the sanguine state of volatility despite a torrent of risks and negative headlines such as deep stress in the banking system due to an inverted yield curve, rising recession risk, inflation, a hawkish Fed, geopolitical concerns, and a looming debt ceiling deadline. 

In Barron’s, Lauren Foster covered some recent comments from Vanguard on the debt ceiling and its impact on volatility. According to the asset manager, more volatility is likely but there’s little to worry about in terms of a default on the debt as it believes an agreement will be reached. However, it sees volatility rising into the deadline.

It also believes that the deadline could be shifted later or that a temporary agreement could be reached. Even if a technical default happens, it’s unlikely that the US would not meet its obligations but it could affect the timing of a payment. But, the asset manager doesn’t think that investors should worry about this scenario. Instead, they should focus on good risk management practices and sticking to their long-term investment plan. 

Finsum: Volatility has remained subdued despite the market facing considerable risks. Vanguard shares its perspective on the matter and how a debt ceiling breach would play out.

All asset managers are adapting to this macro environment in their own ways. In terms of private real estate, funds are taking more time to make investment decisions, exploring new sources of financing, and structuring creative methods to deploy capital. Jenn Elliot covered the cautious behavior among private real estate funds for WealthManagement.

It’s a sharp turn from the last couple of years when funds were much more aggressive in terms of investing and raising capital. Now, raising capital has become much more difficult given that the risk-free rate of return is above 5%. Additionally, rising recession risk, stumbles in the banking system, and stress in commercial real estate have also muddied the picture. 

One silver lining is that many investors have been sidelined which means there is less competition for deals. Thus, private real estate funds have more time to evaluate ideas and can be more selective.

However, the most significant headwind is that a deflationary mindset has become pervasive. Essentially, most investors expect that prices will decline over the next year. In some ways, this becomes a self-fulfilling prophecy. So far, damage has been contained to commercial real estate where there have been a few high-profile defaults and redemption requests. 

Finsum: Private real estate funds are behaving much more cautiously due to higher rates and increasing economic uncertainty.

Ethan Roberts covers the weakness in office REITs over the past couple years in a Benzinga article and whether there is any opportunity to buy the dip. To recap, the sector’s struggles began due to the pandemic with remote work gaining in popularity, leading many companies to downsize or abandon their offices.

Not surprisingly, office REITs were crushed and their struggles were exacerbated by high interest rates. Many of these REITs dropped more than 50% and are trading below their March 2020 levels, despite the broader market being substantially higher. 

However, some contrarians are turning more optimistic on the sector. They believe that valuations have become very compelling especially given that public market valuations are much cheaper than private markets. Additionally, there are increasing signs that corporations are pushing back against remote work culture by insisting that workers must go to the office at least a couple of times per week. 

In addition to this, real-time metrics like metro ridership and miles driven also seem to confirm that more workers are returning to the office. Finally, with increasing cracks in the labor market and expectations that the unemployment rate will increase over the next year, workers have less leverage and may be forced to return to the office. 

Finsum: Office REITs have been crushed over the past couple of years due to the pandemic and high rates. Now, there are some reasons for optimism.

In an article previewing the first quarter earnings season for the energy sector for Zacks Investment Research, Sheraz Mian discussed the major factors for why analysts are forecasting 2023 earnings to decline by about 21% compared to 2022. 

The major factor is that prices are down by about 25% when compared to last year. Additionally, costs are going up faster than expected, leading to downwards pressure on margins. Given these uncertainties, companies continue to be conservative in terms of CAPEX and optimizing balance sheet health.  

In terms of the outlook for crude oil prices in 2023, the major headwind is weaker demand as economic growth decelerates across the world. Many expect the US economy to stumble into a recession later this year as the Fed keeps rates high to tamp down on inflationary pressures. Additionally, Chinese growth has also been less robust than expected following the end of its Covid policies. 

This is sufficient enough of a headwind to offset bullish impulses from OPEC cutting production, sanctions on Russian oil production, and the US government restocking its depleted crude oil inventories. 

Finsum: Earnings for the energy sector are expected to be down 21% compared to last year as recession concerns dominate. 

In an article for Seeking Alpha, Jussi Askola covered the aggressive buying of REITs by the Blackstone group and bullish comments from Steve Schwartzman and John Gray, who are the CEO and COOs of the Blackstone group, respectively. Their investment decisions are monitored due to their leadership of the private equity giant, and its successful long-term investing track record. Additionally, private equity groups are large owners of real estate, so they could have particular insight into the sector.

This is evident in public filings of REITs whose shares fell precipitously last year due to the rise in rates and weakness in real estate. The company has built up a portfolio of REIT assets, totaling nearly $30 billion. Essentially, the company sees a discrepancy between real estate assets in private and public markets with public markets offering more favorable valuations. 

And, it signaled on a recent conference call that it says more upside in other types of liquid real estate securities as other investors pull back from the asset class. And, they note that these opportunities present themselves in REITs that are exposed to strong sectors with no distress. One factor that may appeal to Blackstone is that many REITs currently have a nearly 30% discount to their market value. 

Finsum: Blackstone is being contrarian with its aggressive buying of REITs while most investors flee the sector.