Real estate equities and the related funds are slumping this year against the backdrop of five interest rate hikes by the Federal Reserve. Those are the breaks for rate-sensitive asset classes. However, talk of a “Fed pivot” is increasing, indicating that funds such as the Virtus Duff & Phelps Global Real Estate Securities (VGISX) could be poised for a rebound.
Moreover, the central bank taking its foot off the rate hike accelerator could renew the status of the real estate sector as an inflation-fighting destination. “Hopes for a forthcoming policy pivot from the Federal Reserve and a modest U.S. stock market rally in October following months of losses have sparked optimism that equities’ bear market days may be numbered,” noted S&P Global Market Intelligence.
Indeed, there are signs of life in the real estate sector. The S&P 500 Real Estate Index gained 2% in October and finished the tenth month of the year with a 6% gain over the past week. VGISX is an actively managed fund, so it has the potential to outperform standard real estate benchmarks.
VGISX’s status as an active fund is important because managers can steer investors away from the most strained corners of the real estate sector, and there are plenty of those in 2022, as only the communication services and consumer discretionary sectors are performing more poorly than real estate. Still, there’s optimism that October’s upside for real estate equities and the broader market could be a harbinger of good things to come.
“Whether this rally signals the beginning of the end for the ongoing bear market depends on a number of factors, particularly the Fed’s path forward, whether inflation has peaked and whether the U.S. economy falls into a recession, equity analysts said,” according to S&P Global.
Two other points are in VGISX’s favor. First, real estate investment trusts, including some VGISX components, are growing dividends — an important point at a time when income is precious. Second, some market observers are wagering that capitulation is near, which could pave the way for a rebound by risk assets.
“In one sign of a bottom, fund managers are now showing ‘full capitulation’ as investors have moved 6.3% of their portfolios into cash, the highest level since April 2001, and nearly half are underweight equities, according to an Oct. 18 survey from equity strategists at Bank of America. Stocks are likely to bottom in the first half of 2023 once the Fed starts to pivot away from interest rate hikes, the strategists wrote,” concluded S&P Global.
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