Timing is everything: Three-minute macro
In the coming months, we expect the market to put emphasize the timing of economic inflection points. We also detail our cautiously optimistic view on REITs and highlight that differing COVID-19 vaccination rates are making country picking in emerging markets even more crucial in this month's edition of Three-minute macro.
Timelines to matter in the coming months
Expectations are that over the next few months, U.S. economic data prints will either be too big to measure precisely or too distorted to be meaningful. Consequently, we suspect that the timing will matter a lot more as investors compare the dates of inflection points to their own base case scenarios. For example, if year-over-year inflationary data beats by 1% in the next month or two, our view is that we’re unlikely to see any real market reaction, as base effects are cited and results are shrugged off as an anomaly. However, a more modest 0.5% beat in October would likely be a very different story that could cause the fixed-income markets to test the U.S. Federal Reserve’s resolve. An extended period of outsized employment gains would have similar consequences; conversely, modest gains in the spring would likely lead to people to lower expectations for the fall.
The table below provides a rough idea of what we expect the data to look like over the balance of the year. While there might be variations in terms of magnitude, we suspect that most of the Street has similar timelines for its base case, with the possible exception of housing, on which we’re probably a bit more cautious on a tactical basis. We believe that any meaningful deviations by more than a month or two (which is an uncomfortably short period when talking macro) could beget a reassessment of the outlook and force investors to adjust positions accordingly.
Timeline for normalization
REITs’ yields are hard to ignore
We mentioned our somewhat less rosy outlook for housing on a tactical basis above, as we expect recent strength to decelerate in the second half of 2021 through the reopen. That said, we recently upgraded our overall view of REITs, as the reopening and associated macro backdrop are likely to be constructive for that asset class.
We view REITs as having several attractive characteristics in the current environment. They can provide an impressive dividend yield in comparison to fixed income, real assets, and equities; regarding the latter, the only sector in the S&P 500 Index that has a greater dividend yield than REITs is energy.1 Moreover, REITs are legally obligated to pay out at least 90% of their income to shareholders to maintain their REIT status, meaning they’re less likely to cut their payments than dividend-paying corporations. Of late, many REITs have actually been paying out the lowest allowed amount, yet their yields are still hard to beat. Finally, while rising interest rates are on our radar, they don’t, in our view, represent a headwind that outsizes the benefits from the swift U.S. reopening that represents stronger growth prospects.
A word of caution: The subsectors within the REIT universe are highly bifurcated—we expect industrial, residential, and data centers to continue to fare well but recognize the uncertainty regarding both retail and office, and therefore as a whole, remain in a neutral posture.
REIT yields shine in a low-rate world
Yields on select asset classes (%)
COVID-19 likely to divide emerging-market economies
Asia’s emergence from the pandemic has been threatened by a resurgence in infections across parts of the region. COVID-19 cases are increasing rapidly across parts of Southeast Asia (most notably the Philippines) as well as most of South Asia (India), prompting governments to tighten social restrictions. As we’ve seen throughout the entirety of the pandemic, it’ll likely be the services sector that will bear the brunt of these new measures. However, with manufacturing and construction sites set to stay open and a rise in online shopping likely to offset at least some of the drop in in-store sales, economic activity will likely hold up better than it did during the first lockdowns a year ago. While vaccines offer a potential path to sustained recovery, their rollout in Asia has been slow compared to other countries. As of this writing, Singapore, China, and Hong Kong are the only countries reporting that more than 10% of their populations have received at least one dose.
Given this, within emerging markets, we emphasize differentiation, which favors a country-specific strategy, given the nuances within each economy’s COVID-19 recovery as well as their sectoral breakdowns. For example, an investor looking to gain exposure to the value and cyclical-led reopening trade within the emerging-market space may look outside of Asia and to Latin America, where materials, financials, and energy comprise almost 60% of the market.
Selected Asian countries: share of population having received at least one vaccine dose (%)
1 Bloomberg, as of May 4, 2021.
Important disclosures
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
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