How to Find Value in Real Estate With“Risk On, Risk Off” Off AgainInvesco BlogBy Walter Stabell, IIISeptember 3, 2013
Recent trends, including falling stock correlations, have been strong indicators that the global economy isnormalizing and the practice of “risk on, risk off” investing, in which investors enter and exit perceived riskierinvestments based on how they feel about the economy, is now off again after becoming a phenomenon inthe post-financial crisis years.What this means is that we may be entering into a period in which the individual circumstances of acompany, such as its earnings or fundamentals, are more important factors than large macro events, suchas the eurozone crisis or the US debt ceiling, in the success of an investment.One clear sign of this shift has been the collapse of correlations between stocks in the US equity market. Forexample, stocks in the Russell 1000 Index had a weighted average correlation of 0.30 to the index itself as ofJuly 31, the lowest month-end level since 2007 and down from 0.57 a year earlier, according to DeutscheBank data,
The Wall Street Journal
To put such numbers in context, the scale for measuringcorrelation goes from -1 (perfect negative correlation) to 0 (completely uncorrelated) to 1 (perfect positivecorrelation).Rising stock prices put even greater pressure on investors and investment managers to find value in today’smarket.As fundamental real estate managers, we believe stock selection — rather than country, REIT sector and/orcurrency weights — offers the best opportunity to add value. As a result, we don’t over emphasize suchmacro issues as government or central bank policy.Over the long term, we believe our bias toward lower-leveraged, better-quality companies essentiallyeliminates from consideration those companies with a lower outlook for their markets, lower quality ofmanagement and assets, weak corporate governance and higher financial leverage.While these lower-quality stocks have benefited from risk on, risk off environments, we believe the types ofhigher-quality stocks that we favor will be rewarded with better valuations over time, and we believe ourstrategies are poised to outperform in a more normalized environment. Overall, we feel positive about thelonger-term prospects for returns and our strategies.In this new, developing era that favors stock-picking, we believe quality-oriented strategies are the bestsolution to overcoming the challenges of finding real value in today’s market.1 Source:
The Wall Street Journal
, “Stock Break From Herd,” August 18, 2013The Russell 1000
Index is an unmanaged index considered representative of large-cap stocks. The Russell
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