Over the past few weeks, the low interest rates of developed market sovereign debt have been nothing short of extraordinary.
Historically low U.S. interest rates can be partially explained by a flight to quality and improving fundamentals of the U.S. dollar compared to other developed market currencies, like the euro, the yen and the pound. Falling German interest rates can be explained by a flight to quality within Europe, as well as declining inflation expectations and recent monetary easing action by the European Central Bank. Japanese interest rates can be explained by the Bank of Japan’s massive purchase program, as well as the difficulty of truly exiting the deflation that has persisted there for the past 15 years.1
Falling interest rates have created a shortage of income-producing assets. Real estate, in our view, is one possible solution that not only produces an income stream, but also is a direct beneficiary of the low global interest rate environment as a large borrower of loans.
The WisdomTree Global ex-U.S. Real Estate Index (WTGRE)
This Index was created with a focus on real estate in mind. The positive attribute of these securities is simple: income potential. Within this Index, that potential is emphasized further through the fact that each security is weighted based on the cash dividends it has paid over the year prior to the annual screening date.
By looking at the top 10 country exposures within WTGRE as of August 31, 2014, we asked ourselves the following:
• Have 10- year government bond interest rates fallen over August 2014?
• How does the MSCI Country Index dividend yield compare to the country exposure defined within WTGRE?
• How does the MSCI country index performance through August 2014 compare to that which is defined within WTGRE?
Income Potential & Performance
For current performance of WTGRE click here.
For definitions of terms and Indexes in the chart, visit our glossary.
• 10-Year Government Bond Yields Drop: We call particular attention to France, the United Kingdom and the Netherlands, in that all of their 10-year interest rates dropped significantly. When people think about falling interest rates presently, Europe is one of the first places they look. The real estate exposure in WTGRE performed quite well in each of these markets.
• Dividend Yields: In general, equity dividend yields look compelling within developed markets compared to 10-year government bond yields. In seven out of 10 cases, we see that WTGRE’s country exposure has led to a dividend yield that is even higher than that of the broad country equity market defined by the respective MSCI country index.
• Performance: In seven out of 10 cases, the country exposure defined within WTGRE has outperformed the respective MSCI country index through August 31, 2014. We believe this is indicative of the fact that these income-generating assets have been in demand.