Low weight global real estate

Low weight global real estate

Weekly chart from NN IP. Our quantitative signals for stocks are the most negative.


© Keystone

Markets quickly priced in the latest hawkish moves from the Federal Reserve and the European Central Bank as government bond yields rose, credit spreads widened and stocks fell sharply in recent weeks. Yields and spreads are at multi-year highs and global stocks are 20% below their December peak, so inflation will have to pick up more and economic growth will disappoint markets further down.

But with labor markets still tight and the conflict in Ukraine not abating, we believe inflation has not yet peaked. So it is difficult for central banks to become less hawkish. With indicators of major economic surprises declining, we must be prepared for a marked slowdown in growth. In our view, the risk of a recession has increased in the US and especially in the Eurozone, where the energy crisis is significantly affecting household purchasing power. Because corporate earnings expectations did not adequately reflect the bleak outlook for economic growth, we decided to downplay global stocks.

We were also dropping the weight of global real estate. With central banks becoming more hawkish and inflation likely to rise further, the real estate sector should not rely on support from low interest rates. In addition, real estate valuations related to corporate bond yields remain unattractive. The yield on real estate yields for the 10-year Treasury yield is below its long-term average and lowest since 2008, as you can see in our chart for this week.

Global Real Estate Dividend Yield vs. 10-Year Treasury Bond Yield

Source: Refinitiv Datastream, NN Investment Partners

Meanwhile, MSCI Real Estate’s expected P/E of 27 is still above the 10-year average of 24. Expected global real estate earnings growth is broadly weak at +3%, with -4% for the US and +8% for Europe . However, the outlook for Europe is expected to decline sharply due to weak growth at a time when investors remain a heavyweight in European real estate. The sector has come under more pressure recently as European developers started delaying projects due to rising raw material costs and tighter bank lending standards in Europe and the US.

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