Guy Barnard, Co-Head of the Global Property Equities Team, shares his outlook for 2017. Adopting a balanced view on the property sector, the team’s focus will remain on investing in markets and sectors that are demonstrating resilient growth characteristics and companies with quality assets and management teams.
What lessons have you learned from 2016?
One key lesson from 2016 was that opinion polls are not very useful and that taking macro calls remains outside our area of expertise − vindicating our decision to minimise them. We anticipated the ongoing ‘will they, won’t they’ debate about US Federal Reserve rate hikes and its impact on sentiment towards global property stocks. However, the larger impact from the political fallout and the resulting moves in bond and currency markets took us by surprise. The result was a year of two-halves for property stocks, with strong performance in the first half eroded in the second leaving the sector flat over the year (in US dollar terms at the time of writing). While little has changed in our world of real estate at this stage, a lot has changed around us.
What are the key themes likely to shape the markets in which you invest in 2017?
From a top-down perspective, aside from politics, the gradual reversal of years of accommodative monetary policy will likely cause markets to enter a choppy period of normalisation, assuming this happens in 2017. The ability of looser fiscal policy to generate meaningful growth will determine if the current equity market rotation away from defensive income (bonds and yielding equities, including property) into more cyclical areas of the market is sustained.
From a bottom-up perspective, global bond yields are currently still lower than at the start of the year and the structural need for income remains. Against this backdrop, demand for physical property remains robust and asset allocations to the sector have been rising. Although we expect some markets to soften, fundamentals across most regions remain in relatively good shape. As ever in property, local supply and demand dynamics will dictate asset performance over the longer term, regardless of the global macroeconomic backdrop.
What are your highest conviction positions moving towards the new year?
We are generally skewed toward companies operating in markets and sectors offering resilient growth characteristics even in a lower growth environment. This has led us to favour sectors such as logistics, which is benefiting from the growth of e-commerce, high quality shopping centres as well as niche specialty sectors such as datacentres. Recent market volatility has also provided opportunities, with an indiscriminate sell-off overlooking strong real estate fundamentals, particularly in Australian and Spanish REITs (real estate investment trusts), and German residential landlords.
We believe that at current levels many of the companies in which we invest are undervalued based on the intrinsic value of the real estate owned and the high quality management teams operating them. The market may ignore this for a while, but at some point we expect this value to be reflected in higher share prices.
What should investors expect from your asset class and your portfolio(s) going forward?
Our outlook for the sector remains balanced. While short-term performance will continue to be driven by bond markets and the expectation of a pick-up in inflation, we still believe that investor demand for physical real estate, a real asset with an attractive and growing income stream, will remain robust. The current spread between property and bond yields remains wider than historical averages and we have not seen the excesses in property markets that typically signal a likely significant correction. However, we are late into the property cycle and therefore expect more modest income-led returns from here.
We will continue to play to our strengths next year, reducing macro risks and focusing on fundamental bottom-up stock selection to drive returns through a concentrated, high conviction portfolio. Additionally, as market-wide growth slows, we will place greater emphasis on quality assets and management teams; in our experience the value of these factors will usually reward the patient investor.