The following markets commentary has been provided by Federated Hermes, including comments on the global commercial property market.
Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited:
With the exception of the handful of names benefiting from the AI-opportunity/hype, equities have been in the shadow of fear for much of the last year. Finally, measures of risk aversion started to ease last month. The timing is intriguing: investor optimism contrasts with growing pessimism towards the macro outlook. A downturn in US output is increasingly likely, with industrial activity weaker than expected and the labour market beginning to slow. The Fed’s June minutes reinforce the possibility of two more rate hikes this year. Investor optimism may be hard to maintain.
The tighter the Fed turns the screw on rates the harsher the impact on the economy will be, and the harsher the impact the quicker the Fed will need to cut rates. Overtightening would require more drastic action on the easing side, whereas the Central Banks’ goal now is to find a controlled exit from high inflation with gentle monetary easing on the way out. We don’t yet see fast rate cuts and are preparing for a slow exit but have a keen eye on metrics for overtightening.
Opportunities in this environment continue to be Mega Cap Growth stocks as they are sat on strong balance sheets with well protected market positions. These names continue to appeal to those investors seeking growth but also to those favouring quality.
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Vincent Nobel, Head of Asset Based Lending, at Federated Hermes Limited
The triggers may be different every time, but real estate market “corrections” seem pretty severe every time, and are a regular feature of the property market. Both buyers and sellers are unsure where to value, and certainly where to transact.
To avoid being swept up in boom-and-bust cycles, institutional investors must find more cycle-agnostic investment strategies. In the search for more reliable returns, the objective is not to make lots of money in the “good times” but to make decent returns consistently.
One way to do this is to find assets that seem likely to generate income throughout a cycle and to have hold-periods that extend well beyond the typical cycle. This changes the underwriting focus to the long-term ability of the assets to attract tenants. Who cares whether the market values this at a 5% or a 7% at any given time?
Another “cycle-agnostic” strategy is to be a senior lender. Any cyclical market value decline should fall well within underwriting parameters, and therefore should (in theory) not affect the financial returns of senior loan portfolios. This of course depends on the way risk was underwritten, and on whether these cyclical corrections come at the same time as structural decline, such as we currently see in the office market, particularly for tall office towers.
So in short, we should not be surprised to see low transaction volumes in this environment. For investors that are able to hold assets for the long term, now is not the time to sell. While corporate failures remain low, and rent is paid, lenders are unwilling to force asset sales triggered by minor Loan-to-Value breaches. The market seems to be largely in balance between asset owners that do not want to sell, asset buyers that do not want to buy and lenders that are not enforcing on defaulted loans. In other words, something needs to happen to trigger some movement.
