Yields have been on a downward trend since the end of 2013 but bottomed in September and began creeping up even before the November 8th Presidential election, largely on the prospect of a Federal Reserve interest rate hike. Once Donald Trump was announced as the next President of the United States, yields in the US and Canada spiked due to the promise of significant infrastructure spending. That has two primary effects on interest rates: increased economic activity leading to inflation and large budget deficits to pay for spending leading to new supply of Treasury bonds. In spite of the divergence in Central Bank policy between Canada and the US – the Bank of Canada has reiterated its stance to leave their policy rate at 50 basis points whereas the Fed is signalling a rate hike to 75 basis points at their December meeting – Canadian yields followed their US counterparts upwards.
The movement in interest rates over the past few months has had a profound impact on sectors and stocks that are classified as ‘bond proxies’ – those companies with high yields and stable income streams. These predominantly include utilities and REITs, but have been extended to include Consumer Staples stocks in recent years by desperate income focused investors. Due to the increase in rates, these bond proxies have sold off as some investors have rotated part of their portfolio back into bonds. I found the selloff to be a compelling reason to take a close look at these sectors, with a focus on the REITs, in the hopes of finding an opportunity – the old adage of buy when everyone is selling (and sell when everyone is buying).
I looked at the relative yields of ten REITs compared to the Government of Canada (GoC) 10-Year bond yield. The multiple for every REIT has been over one standard deviation fairly consistently since the end of 2014. This has occurred even as the price of the securities has risen (lower yields due to the formula: dividend/price). Therefore, we can conclude that this occurred because interest rates declined so quickly and drastically.
However, the recent spike in interest rates over the past few weeks have caused the multiples of most REITs to fall back to within one standard deviation of their historical average. Due to the inverse relationship of price to yield in my equation, those REITs that continue to have a multiple in excess of the one standard deviation band are oversold (cheap) when compared to the yields of the group as a whole. Those include Cominar and Boardwalk. On the flip side, Canadain Apartments and Smart REIT have seen their multiple fall to near their long-term average, so their prices may come under more pressure since this implies that their prices have not adjusted as much as their peers.
This work interesting as a starting point of further investigation but should not be used as the sole basis of any investment decisions.
REITs - A closer look post selloff
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REITs - A closer look post selloff
http://www.anonymouslyinvesting.com - Simple and honest investment advice that is transparent and trackable
Re: REITs - A closer look post selloff
Spam?
Triage Investing Blog - A Source for Value & Dividend Investing and Business Fundamentals
Re: REITs - A closer look post selloff
It's just opinion. You can take it or leave it just like everyone else's opinion posted here. I don't see anything he/she/it is trying to sell ..yet.brad911 wrote:Spam?
"A dividend is a dictate of management. A capital gain is a whim of the market."
Re: REITs - A closer look post selloff
It looked like a cut and paste......it was just a question, not a judgement.
Triage Investing Blog - A Source for Value & Dividend Investing and Business Fundamentals
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Re: REITs - A closer look post selloff
Style? spam style? the other post breathlessly includes 'up 7.58% since yesterday with more to go' I liked Blondie