Market expectations of interest rates
Janet Yellen has so far only raised rates when the market anticipates it. She has taken great care to signal her actions ahead of time so as to not shock the market. Well, the market is now anticipating a rate hike in March with the expectation index well over 50%. We think it will happen and have positioned 2CHYP accordingly.
Most of our triple net lease REITs have been sold at a profit (WPC) (LXP) and (GOOD). These seem most susceptible to an immediate market reaction when rate hikes occur as investors often own these strictly for their yield.
We have repositioned the money into REITs with more exciting fundamental stories like Catchmark Timber which can benefit from an American housing renaissance and UMH which brings affordable housing to the masses. As manufacturing jobs return to the rust belt, UMH will benefit from the corresponding household formation.
2nd Market Capital is a value firm and we are traditionally fundamental value investors. This is an unusual market in which a substantial number of growth REITs have gotten cheap enough to fall into value parameters affording us the opportunity to get both value and growth. Beyond CTT and UMH, Stag Industrial and CorEnergy offer excellent growth potential while trading at discounts to their respective peers.
The next few weeks will be rocky if the rate hike does in fact occur, and we will continue to adjust as opportunity dictates.
Commentary may contain forward looking statements which are by definition uncertain. We retain no obligation to update or correct forward looking statements should the available information change. Actual results may differ materially from our forecasts or estimations.