Below market views are provided by the respective fund house.
Decades-high inflation and aggressive Fed rate hikes dragged equities and corporate profit estimates lower amid growing fears of a recession. The conflict between Russia and Ukraine as well as persistent COVID also dented investor sentiment. In this environment, global REITs were lower alongside global equity markets in the first three quarters of 20221.
The current environment remains uncertain as to whether central banks will succeed in taming inflation, while at the same time preserving economic growth to avoid a potential recession. We do expect that the aggressive measures taken by many central banks will lead to a moderation as the year progresses and as we enter 2023. Much attention will be placed on near-term economic data to see how well central bank policymakers are doing in order to temper inflation while avoiding an economic recession. With that in the near-term, we expect conditions to remain volatile as economic data is released but we remain positive on the long-term prospects for global economic growth.
We believe Global REITs remain an attractive asset class in the current market environment with a combination of favourable valuations and distribution yields. Furthermore, we believe dividend and earnings growth will continue to trend positively resulting in an attractive alternative for income-seeking investors. We have seen dividend growth persist in 2022 and expect further growth going forward as the economy recovers.
Despite this positive view, we consistently monitor potential risks across global REITs, including geopolitical risks that could weigh on global markets. Select sub-sectors and regions within global REITs may continue to see some earnings pressure from the ongoing impact of the COVID pandemic. We believe any near-term pressure on real estate fundamentals will ease over time as the global economy recovers, especially in the Office, Retail, and Residential sub-sectors.
From a regional perspective, we favour the U.S., Canada, Australia, and Singapore markets, owing to a combination of attractive valuations and distribution yields. Within these countries, and from a global perspective, we see investment opportunities within Industrial, Retail and technology-related REITs.
Overall, we believe the long-term outlook for global REITs remains positive given the continued strength in real estate fundamentals. Distribution yields within the REIT market remain favourable compared to other yield-oriented investments and the prospects for dividend growth within the sector should continue to present an attractive alternative for investors seeking income. We also continue to find compelling opportunities within the REIT market that trade at significant discounts to what we view as their intrinsic net asset values.
1 Bloomberg, as of 30 September 2022. Global REITs measured by S&P Global REIT Index; Global Equities measured by MSCI ACWI Index.
A combination of high inflation and full employment has led the Fed to adopt a drastically different approach to monetary policy in the past few months. We believe that market pricing of expected rate hikes is overdone, particularly against a backdrop characterized by, as we expect, slowing growth and some moderation in inflation.
While uncertainty has increased, we remain constructive on corporate fundamentals overall. Given the global economic uncertainty, the portfolio is invested in high quality companies that offer attractive yields. The investment team continues their defensive position stance since 2019, with overweight allocations in areas such as utilities and underweight allocations in retail fixed-coupon securities. Corporate credit fundamentals are strong. Valuations are attractive and balance sheets are strong. Financial sector credit fundamentals are strong, much different than the global financial crisis in 2008-2009. Energy and utilities have strong fundamentals, two sectors we are overweight. Even in the event of a recession, the strategy is invested in high-quality companies, companies that able to withstand an economic downturn. We believe it is well positioned to weather higher rates and inflation with its fully diversified portfolio.
As of end of August, the strategy has outperformed broad preferred market on 3 month, 6 month, year to date, one year and three year basis apart from achieving a higher income yield1.
With increasing market volatility and lifting inflation, investors are seeking stable and higher income assets. Preferred securities can offer a combination of attractive yield characteristics, inflation-hedging potential, and interest rate risk mitigation.
As an investment-grade asset class, yields of preferred securities are comparable to those of high yield bonds. When economic growth slows, markets typically experience a flight to quality. With an average credit rating of BBB-, the investment-graded preferred securities are relatively high-quality assets. Over 90% of preferred issuers are rated as investment grade2.
We believe that very few, if any, preferreds will default in 2022. Historical default rates among preferred securities have been low primarily because issuers are generally well-established, high-quality companies with solid balance sheets. The preferred market has experienced 15 upgrades with only 6 downgrades, and 8 rising stars year-to-date3.
1 Source: Bloomberg, Manulife Investment Management, as of 31 August 2022.
2 Source: Bloomberg, as of 31 August, 2022. Preferred market is measured by ICE BofAML US All Cap Securities index (I0CS).
3 Source: Bloomberg, Manulife Investment Management, as of 30 June 2022.
Set against a backdrop of deteriorating global economic growth, elevated inflation, and negative investor sentiment, global markets have spent the past quarter pricing in an increasingly hawkish profile for central bank rate hikes, leading to a sharp spike in volatility across asset classes.
Inflationary pressures should unwind gradually over the coming months, but they’re likely to remain at elevated levels through the rest of 2022 and into next year. We expect headline CPI readings to begin to diverge from Core CPI readings: Food and energy prices are likely to remain high, but more interest-rate-sensitive items should begin to display signs of disinflation. We expect inflation to have materially decelerated by the middle of 2023 on the back of base effects kicking in, an expected buildup in excess inventories in non-auto retail goods, and the alleviation of supply chain disruptions.
Global central bank tightening in both DM and EM will contribute to deteriorating global liquidity conditions and act as a headwind to growth. While we initially expected central banks to shift their focus from tamping down inflation to addressing growth-related concerns later this year as economic data worsened, obstinately high inflation readings gave most central banks little choice but to continue raising rates despite slowing growth, thereby amplifying recessionary dynamics.
That said, we believe the Fed, the Bank of Canada (BoC), and other major central banks will begin cutting rates in Q3 2023, a view that’s consistent with current market pricing. The brewing energy crisis in Europe has cast a dark shadow over the region’s outlook—talks of preemptive gas rationing in the winter months are a reflection of how severe things can get on the Continent.
We remain in a challenging environment for global markets - growth and earnings could disappoint due to growing global logistical challenges, but also due to the growing pressure on policymakers to reduce their stimulus efforts in the face of rising inflation. The market is pricing in an aggressive hawkish Fed, whilst sentiment is arguably at extreme bearishness..
Tactical positioning will be more prevalent again into 2022, to be able to nimbly add and de-risk portfolios as well as add to yield opportunities as they arise. Overall, we are tilted towards higher rates from here and stable spreads, but see yields keeping contained given the potential for macro data disappointments.
In a higher-rate environment, we capture income via exposures to high-yielding bonds. Although bond prices typically fall under higher rates, this can be mitigated by managing the interest rate sensitivity (or duration) exposure. In theory, high-yield bonds are less sensitive to interest-rate rises, hence can be more cushioned against a significant rise in rates. A bottom-up security selection approach to income harvesting allows us to invest into the corporates that can maintain their businesses in this type of environment, whilst providing a sustainable fixed income coupon or dividend yield. In the last six to eight months as of June 2022, for example, the team have been less focused on EM debt but rather having a preference for increased allocations towards US credit because of low US default rate expectations, a relatively stronger US economic backdrop and hence a stronger US dollar, covid-19 concerns in EM, as well the ongoing impact on debt markets around issues in China and Russia.
Our global multi-asset diversified income approach is not reliant on the continued growth of equity or fixed-income markets. We will remain focused on generating higher, sustainable natural yield from a range of assets with lower correlations and expected relatively lower volatilities than strategies that are more reliant on asset appreciation.
We believe the search for income will continue, and remain an attractive segment for investors. Yields are now higher for income investors to capture a higher income versus prior months, spreads are wider, offering potentially attractive spread opportunities, whilst equities are markedly lower, pricing in an already challenged set of headwinds that could provide recovery opportunities over the next 12-18 months.
1 Source: Multi-Asset Solutions Team (MAST) in Asia, as of August 2022. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. The above information may contain projections or other forward-looking statements regarding future events, targets, management discipline or other expectations. There is no assurance that such events will occur, and the future course may be significantly different from that shown here.
Disclaimer – Quarterly Asset Allocation Views
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Disclaimer and Important Notice - Quarterly Fund managers’ Views
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