Steven DeSanctis has seen enough.
“For the first time in my career, we are moving to an Overweight on Real Estate, as interest rates around the globe are NOT going anywhere and US rates are tethered to the global markets and thus heading lower,” wrote the Jefferies strategist in a note out Wednesday morning.
DeSanctis’ timing was impeccable. The benchmark U.S. 10-year Treasury note TMUBMUSD10Y, +0.00% was tumbling – it lost nine basis points, or about 5% – overnight – falling fast enough to spook stock investors. And yes, “for the first time in my career” actually means something in DeSanctis’ case. He has worked in financial services since the late 1990s.
It’s worth noting that U.S. government bonds are certainly a better bet than those issued by other countries. Germany’s 10-year bund, the U.K’s 10-year gilt, and Japan’s 10-year note all offer negative yields, meaning investors pay for the privilege of owning them. Still, low U.S. yields – 1.62% on the 10-year mid-morning on Wednesday – are a pittance for anyone in search of fixed income.
Related: U.S. government bonds going negative are a real possibility, Pimco analyst says
“Quest for yield can be quenched by real estate,” DeSanctis noted. There are a few additional reasons he and his team are recommending the sector.
During past Federal Reserve easing cycles – periods when they’ve cut interest rates – real estate “gets out to a slow start but relative performance picks up” until it performs better than other sectors, he said.
Real estate is inversely correlated with volatility, which is still rising (the CBOE Volatility Index VIX, +6.27% is up more than 42% since the start of August.) Real estate is a domestic investment, with less than 5% of its revenue, on average, coming from outside the U.S., DeSanctis said. That makes it a good hedge against worries about trade wars and protectionism.
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“Yes, valuations are expensive on an absolute and relative basis but again, with rates this low valuations for the group should be higher,” he noted.
Jefferies’ real estate analyst Jon Petersen prefers industrial and apartment real estate plays, such as Rexford Industrial Realty, Inc. REXR, -0.21%, STAG Industrial Inc. STAG, -0.40% , and UDR, Inc. UDR, +0.81% , a luxury apartment real estate investment trust. “Be careful with malls,” the team wrote.
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