With countries around the world facing record-high inflation numbers over the past few months, central bank policymakers are being forced to open up on lax measures taken during the start of the pandemic. In addition to talk of rate hikes, recent language has focused on monetary tightening plans, which have contributed to REITs’ recent struggles.
From Russia’s point of view, markets seem to be fully priced in negative perceptions related to the negative impact of higher rates and tighter policies. This means investors can be willing to accept the empirical reality that when rates start to rise, REITs are generally a solid area to invest in.
“Interest rates generally rise in an environment where you have a strong economy, strong job growth, and inflation,” he says. “Those three things are the biggest drivers of growth in top-line revenue and net operating income. Earnings growth offset any potential increases in cap rates or credit costs.”
As a stable asset class with recurring income that also has the potential to grow, REITs may appeal to investors looking for alternatives to weather the current economic uncertainty. Because of that, a lot of capital has flown out of the fixed-income universe with little to no growth and has moved into the REIT space to respond to interest rate moves in a formulaic negative way.
The current environment of high inflation and rising rates, Rousseau says, poses an enigma for money managers. Traditionally, one way to offset the higher cost of capital from rising rates has been to invest in growth stocks; However, their past decade’s outperformance relative to value means that growth stocks are trading at higher multiples than in history. Also, today’s extreme levels of inflation mean that one cannot just blindly buy value stocks, as most of them do not come with much growth.
