A Comment -- General Comments From an Expert (A Commentary)

No shortage of negative headlines on commercial real estate. Office space was hit because it had capital expenditures rising faster than rents, and then the pandemic changed how we all use office space. 

Other headlines revolve around transactions that occurred in a different rate environment, and how they're working out today. Fundamentals in data centres and industrials are quite strong. With interest rates peaking, you're starting to see more bidders come to the table, construction activity go down, and financing become more available. Interest rates are in line with historic averages.

He's quite optimistic about real estate transactions occurring in the private market. Definitely bullish on valuations of publicly traded real estate.

They do, and they've been quite open about it. Yesterday, a spokesperson said they have $64B of dry powder ready to invest in real estate. They've already privatized 2 real estate entities in the past 6 months; TCN was taken out at a 30% premium. They see private markets as fully valued, but public markets as being on sale. It's an opportunity to put lots of capital to work in a very short timeframe, and to be able to finance it.

He's been doing this a long time, so he's seen a few movies. Any time you see interest rates peak, and fundamentals bottom, is the right time to be buying. Blackstone said that when sentiment is at its most negative, that's the time to step into the market.

We've seen this before: after the 2001-2002 recession, the great financial crisis, and March 2020. When values dislocate, real estate becomes such a great store of value. People look at it as a great inflation hedge. Great opportunity to be buying.

Yes. Almost as if third-party logistics companies thought they could supply patio furniture forever. Reality is that industrial real estate is down 17% from peak pricing. When he looks at public markets, industrial REITs are down 30-40%. Over-discounting what is really a temporary slowdown in decision making by tenants. Spread between in-place rents and market rents is quite wide, ability to capture a lot of cashflow.

It causes a lot of froth. Lots of cross-currents with promises made, possible shift in balance of power, polarizing situations. We're probably going to pause here for a little bit, and then ramp up.

Traditionally markets go sideways in summer, as it's more sell in May go away. In an election year, there's a bit of sell in May but it happens later in the summer, around July. And then markets pop up. 

It's a bit of an odd market. There's this tension between inflation-focused investments or commodity-type things versus the growth story. Your portfolio could look kind of weird if you try to create it from the world that you see, and it might not be best for you at this kind of time. Barbell might be a way to describe it, where things are seemingly opposite with tech and growth along with base metals and commodities and such.

Yes. They've been doing that consistently for Q1, Q2 and Q3, and then the outlook for the full year was raised. Not just the earnings, but the revenues too. Pretty positive.

It's just not going away. We saw the bottom of something like 0.4% back during Covid in 2020. And it's around 4.60% today. A bit of a correction late last year, but it wants to keep going higher.

When it pops above 5%, it starts breaking parts of the market. We're moving back up to that level right now. Bank of Canada may cut next week, but the Fed's ambassadors have been messaging that it might actually raise once more. The market's taking it up in advance of that.

Lot of volatile spots. Volatility is pretty high, with some pretty big moves. If you look through it all, we have an uptrend. You just have to bear with the periods of weakness and correction. And then the uptrend resumes amidst some rotation. It's your normal corrective market, but with more at stake this year we're seeing a bit more volatility than normal.

We've seen a pretty good dose of rotation change over the last year. We've come back to growth with the NVDA's of the world and technology. The AI focus has contributed. See his Top Picks later for an AI pick that's more downstream, but really connected to AI.

Whole sector's been a pretty good place to be. If you're looking for real strength as far as opportunity goes, move downstream from the big names to mid-tier names like IMG. Those are the ones that are behaving quite robustly.

Often it works to buy a basket, and then drill down and add one name for some extra alpha.

Hedging Options:

Value stocks as a hedge. We agree with this thought process, and it ties into the importance of diversification in a portfolio. Tech stocks are generally classified as ‘growth’ stocks, which are characterized by trading at high multiples, not paying dividends, and the goal is capital appreciation. Due to these characteristics and the consumer focus of technology companies, they typically perform poorly in a recessionary environment.

So, in order to hedge tech stocks an investor would want to have an efficient allocation towards stocks with the opposite traits. Value stocks would fit the bill here, typically being stable, mature companies that trade at low multiples, and which pay dividends at regular intervals. In a recessionary environment, there is typically a shift towards value investments due to the stability they provide. Therefore, by incorporating an offsetting allocation towards value stocks into a portfolio that may be too heavy in technology, there will be some degree of ‘hedging’ in the event of a sector downturn in tech.

Stocks in defensive sectors specifically would also be good to target as a hedge. Defensive sectors are those that are seen as ‘recession-proof’ and will perform similarly no matter the market conditions. Defensive sectors typically have companies with ‘value stock’ characteristics. Sectors such as: energy, consumer staples, and utilities are commonly thought of as being defensive. Utilizing an ETF in one/multiple of these sectors would be an efficient way to manage one’s portfolio.
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Markets will be choppy in the second half of 2024. Yes, the economy has been outperforming, but there are definite signs of stalling. Interest rates of the last 2 years needed time to impact the economy, but this drag effect is starting to happen. It's been offset by crazy spending by world governments, which has kept things going. It's an okay environment for companies, though. Inflation remains higher than expected, so he expects no interest rate cuts this year. Some company valuations are getting stratospheric, but there is opportunity in neglected areas. Everyone is chasing megatech.

She notices a bearish engulfing pattern in the S&P chart, meaning the possible end of the uptrend. Last week saw this pattern devour gains made in the previous five sessions; support was at $5,250. Note that support last March when the S&P peaked was $5,265. If the S&P holds above this support, then the rally continues. If it falls below that, then it will fall to its next level of support which is the 13-week moving average. Also, the SPEXW (the S&P 500 Equal Weight) indicates that the rally is broadening out, which is positive. Sectors: Inskip isn't bullish in real estate unless it breaks its 200-day moving average (based on the XLRE chart). Now, is a crucial time in the S&P. 

That's right. The simple reason is that he thinks and behaves long term. The average time for holding securities has dropped from 5 years in the 1970s to 10 months today. So when your time horizon is 5-10 years, you've already separated yourself from many investors out there.

With a long time horizon of 5-20 years, you're going to have periods of high inflation and periods of low inflation. High interest rates, low interest rates. Tense geopolitical situations, more relaxed ones. So when you think of it through that lens, and accept that you can't control any of these factors, an investor's stock analysis should focus on the things they can control.

Good companies tend to stay good and get better. Weak companies tend to stay weak and get weaker. During periods of economic weakness, he finds that the under-levered, founder-run, founder-owned businesses, rather than being reactive, can gain market share and perhaps make attractively valued acquisitions.