The summer saw a host of (political) headlines with the potential to create significant volatility in global stock markets, but equities so far have broadly weathered the (twitter)storm of “Trump, Trade and Turkey” news. While the market’s nervousness about, for example, a comprehensive trade conflict is real, equities in general, and US stocks in particular, have come through the war of words pretty much unscathed, notwithstanding bouts of relatively short-lived volatility. Real estate, and US REITs in particular, have been among the havens that investors have sought out.
Limelight shines on defensives…
The highest profile challenge to market calm came in the form of the Trump administration’s declaration of a trade war with friend and foe alike, even though it principally targeted China. Beijing retaliated and pledged to respond again if the US followed through on a threat of further levies. But to date, the impact of any tariff escalation has been muted with a number of equity strategists pinning their hopes on support from strong underlying company earnings.
A more considered approach may also look at what has happened to REITs across global markets. The strong performance of defensives such as REITs during the recent uncertainty can, in our view, be seen as a portent of the market reaction to any future escalation.
Property stocks have managed to provide relative safety for investors since the US started formalising trade sanctions against China at the end of the first quarter. Real estate globally has returned 11.9% since the start of Q2 2018 and has outperformed global equities (+7.2%). This performance is notable given the concerns among investors at the start of 2018 over the impact of rising US interest rates on real estate across the world.
…And on real estate in particular
Part of the explanation relates to how real estate is perceived. It is viewed by certain investors as having less international exposure than other sectors and this has certainly benefited US REITs since the trade war started in earnest.
Moreover, while concerns about the outlook for trade have increased, globally, bond yields have not risen as quickly as investors had expected at the start of 2018 and the yield curve has continued to flatten. This supported REITs, not just in the US, but globally.
The US has been one of the strongest real estate markets, along with the Nordics, Australia and Germany (in local currency terms), while more open, trade-dependent markets such as Singapore and the UK, along with Asian markets more broadly, have underperformed (see exhibit 1). In euro terms, the US has been the second strongest market after Sweden.
Exhibit 1: Total returns of listed real estate markets since the start of the trade war
Note: Returns shown from the period 04/04/2018 to 31/07/2018. Source: Bloomberg, as of September 2018
Exhibit 2: Total returns of US REIT sectors since the start of the trade war
Note: Returns shown from the period 31/03/2018 to 31/07/2018. Source: Bloomberg, as of September 2018
This is not intended as a solicitation to purchase these securities, nor does it constitute any investment advice or recommendation. The value of your investments may fluctuate. Past performance is no guarantee of future returns.
The strength of the more defensive REITs and those more sheltered from international developments can be seen in US domestic markets (see exhibit 2). Tech-focused REITs such as datacentres have outperformed along with more defensive, interest-rate sensitive sectors such as health care and single tenant (net lease) companies as opposed to more cyclical sectors such as office, industrial and self-storage.
Indeed, industrial REITs have been one of the weaker sectors despite benefiting from the strongest market fundamentals including low vacancy rates and rents and property prices rising well ahead of inflation. Listed real estate investors, perhaps fearing a trade war , would see tariffs disrupting supply chains and potentially weakening market fundamentals, and have been less inclined to buy this sector.
Uncertainty and volatility: a good time for a home bias
Clearly, the capriciousness on the (trade) policy front is not yet over: almost daily, political events provide surprises to test the market. There is also the background music of central bank policy normalisation accompanying the sound and fury of the trade and twitter storms. And changes in Federal Reserve, ECB and BoJ policy may eventually test market sensitivities more extensively.
Investors would thus be well advised to consider to what extent they believe the market will remain sensitive to any stresses generated by the trade tensions, the fallout from Turkey’s fiscal and economic fragility and any political rumbling in Europe over Italy and Brexit.
Their perception of the potential level of political and economic risk will determine their exposure to companies and sectors most insulated from trade headlines. The early trade skirmishes suggests that domestically focused sectors are likely to profit the most, while more open, trade-oriented economies could be more vulnerable if tensions run high. Companies with high domestic revenues and limited goods sourced from abroad such as REITs and markets such as the US could continue to remain in favour.
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 MSCI World and FTSE EPRA Nareit Global total returns (in EUR), 31/03/2018 to 31/07/2018; source: Bloomberg. The value of your investments may fluctuate. Past performance is no guarantee for future returns.