Global Public Equity – Quarterly Review

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Property stocks were largely unchanged during the quarter as several macro events caused stocks to fluctuate

The continued trade war between the US and China took several turns in the quarter and buffeted the direction of stocks. In the first part of the quarter, the market thought the two sides were nearing a deal when the US abruptly broke off talks and threatened more tariffs. Tensions between the sides flared after that, but cooled when Presidents Trump and Xi met at the G20 meeting in Japan and agreed to a tariff truce for the time being.

Central banks were in the spotlight as well, as we had several dovish moves or messages around the globe. The European Central Bank (“ECB”) reiterated its dovish stance and said it could implement more monetary stimulus given continued below target inflation. Meanwhile, the Reserve Bank of Australia implemented two 25 bps rate cuts during the quarter to lower their cash rate target to 1.00%. Finally, the US Federal Reserve (the “Fed”) signaled a more dovish stance at its meeting as the market began to expect rate cuts sooner rather than later.

In Asia-Pacific, property stock performance was mixed as gains in Australia and Singapore were offset by declines in Hong Kong. Hong Kong performance was impacted by the ongoing China-US trade war as well as several mass protests regarding a proposed China extradition bill. In Australia, the recent rate cuts helped along with the surprise election results, which put the incumbent party back in power and put potential unfriendly property policies away.

The continued trade war between the US and China took several turns in the quarter and buffeted the direction of stocks

In Europe, weak purchasing manager indices continue to point toward slow growth in the region.1 The United Kingdom underperformed Continental Europe over elevated fears of a hard Brexit. While the deadline for Brexit was moved to the end of October, there has been no prime minister since Theresa May stepped down, so few negotiations have taken place. In Germany, the residential market received a surprise negative as a proposed five-year rent freeze moved closer to law.

In the US, we saw the first yield curve inversion of this cycle as the 10-year and 3-month treasury yields inverted. This is often a potential sign of a coming recession. While the economic data has been weaker as of late, the credit markets remain calm as spreads remain tight.

The upside to the decline in interest rates globally has been a significant uptick in equity and debt issuance by REITs. This will give many more REITs dry powder to acquire and grow earnings. We continue to see ample debt and equity capital for real estate assets, which, along with lower interest rates, should support property values and the property market cycle going forward.

Regional Overview

FTSE EPRA/NAREIT DEVELOPED RETURNS IN USD

Asia-Pacific

Hong Kong made the most headlines during the quarter as the US-China trade war and mass protest negatively impacted stocks. Retail sales continued the softening trend as all three months saw declines after such strong growth in 2018.2 The continued uncertainties surrounding the US-China trade war, the slowing Chinese economy, and continued social unrest are all likely to have a negative effect on Hong Kong retail sales going forward. However, the lower interest rate environment is expected to have a positive impact on the residential market, which would be a positive for developers that commence new launches.

Retail sales continued the softening trend as all three months saw declines after such strong growth in 2018

Australia also made headlines as the election in May produced a victory for the incumbent government that was not predicted by the polls. The Labor opposition had proposed policies that were perceived to be negative by the market, so their defeat caused stocks with residential exposure to climb.

In Japan, the office and logistics markets remain robust as Tokyo office vacancy continues to decline nearly every month.3 We also favor the residential market and hotels due to their strong fundamentals compared to the weakness we are seeing in retail.

Europe and UK

The 10-year German Bund yield plunged to all-time lows as the ECB expressed its dovish stance, driving better performance out of Continental Europe than in UK property stocks. However, shares of German residential stocks fell significantly in early June as a proposed five-year rent freeze moved closer to being implemented. We expect the economic data to remain soft for the foreseeable future, which should keep interest rates low and be supportive of real estate values.

North America

Leading indicators of the economy trended down and sent interest rates down with them as the markets are increasingly pricing in potential rate cuts from the Fed.4 However, we continue to see positive job growth, which is fueling demand for commercial real estate. During the quarter, we reduced our exposure to data centers over concerns about a slowdown in leasing activity. While the secular tailwinds for the sector remain, the large internet service companies, like Microsoft and Facebook, are taking a brief pause in leasing new space after several years of very robust growth.

We also had more merger activity as Park Hotels & Resorts Inc. agreed to acquire Chesapeake Lodging Trust.

We expect a slowdown in economic growth, but it should remain at levels we have seen through much of this cycle

Outlook

Despite recent volatility, both up and down, our outlook is little changed from the prior quarter as we look around the globe at real estate fundamentals and see a continued positive environment with job growth driving demand and supply remaining at or below long-run averages in most sectors and cities. We expect a slowdown in economic growth, but it should remain at levels we have seen through much of this cycle. This should support property values, but where stock prices are not rising in tandem, we expect to see management teams look to mergers and acquisitions and other methods to create value to close the gap between public and private valuations.

 


REFERENCES

  1. Markit
  2. Census and Statistics Department Hong Kong
  3. Miki Shoji Co., Ltd.
  4. Markit Purchasing Managers’ Index.


Disclosures
  • Past performance is no guarantee of future results.
  • The performance information in the preceding Commentary does not reflect the performance of any fund, product or account managed or serviced by Heitman.
  • The views and opinions in the preceding Commentary are as of the date of publication and are subject to change.
  • There is no guarantee that any market forecast set forth in this presentation will be realized.
  • This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
  • Commentary not to be re-distributed without permission.
  • NASDAQ is a broad based capitalization index-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Dow Jones Industrial Average is the measure of the performance of 30 “blue-chip” stocks, considered the leaders of the market. The S&P 500 Index is an unmanaged index generally considered to be representative of the large cap segment of the market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 11% of the Russell 3000 total market capitalization. The Dow Jones Utility is price-weighted average of 15 utility companies that are listed on NYSE and involved in production if electrical energy. The MSCI World Index is free-float weighted equity index which include developed world markets. The FTSE EPRA/NAREIT (Europe Public Real Estate Association/National Association of Real Estate Investment Trusts) Index is a total return performance index of all equity REITs tracked by FTSE EPRA/NAREIT. The Indices are presented for illustrative purposes only and are not intended to imply Heitman’s past or future performance. The performance of the Indices assumes dividend reinvestment, but do not reflect transaction costs, advisory fees, custodian fees, trading costs and other costs of investment. Individuals cannot directly invest in any of the Indices described above.