CNBC – Aug 2016

Real estate gains new market prominence starting Thursday

The S&P Dow Jones Indices and MSCI will give real estate its own unique class, separating it from the gang within the financials sector. The parting of ways comes as real estate as a sector has outperformed the S&P 500 with S&P’s REIT industry index up 24 percent annually since the bull market began in 2009, versus 18 percent for the benchmark.

The new classification will include all real estate investment trusts (REITs) with the exception of mortgage REITs, which will remain classified under financials.

 

Man reviewing financial affairs using investment statement

Rafe Swan | Getty Images
Man reviewing financial affairs using investment statement

Being a standalone category is a double-edged sword. The new classification will attract passive investors looking to track a new major sector of the market and may bring in new money from active investors who may not have been aware of the sector’s strong performance. But memories of the real estate crash and the mortgage crisis in 2008 may be enough to deter some investors, rightly or wrongly, who still see real estate as risky.

“Reclassifying REITs and real estate operating companies (REOCs) into a standalone sector, apart from providing a more accurate description of the companies themselves, will likely raise the profile of real estate fundamentals overall,” said Jamie Anderson, managing partner of Tierra Funds, which offers the Tierra XP Latin America Real Estate ETF.

REITs have outperformed the broader markets because they are a strong dividend play in a low-yield environment. REITs are required to pay at least 90 percent taxable income annually in the form of shareholder dividends; real estate stocks today provide 7 percent earnings growth and 3-plus percent dividend yield. In addition, the fundamentals of the commercial real estate market, especially the industrial, apartment and office sectors, have seen a strong recovery since the recession. Their classification under financials may not have highlighted that strength.

Technically, what is happening is that real estate will be its own category in something called the Global Industry Classification Standard structure, a guidepost of sorts for the global financial community. This marks the first time a new sector has been created under the GICS structure since it began in 1999.

“This is the first significant structural change to GICS sectors since its inception and reflects the position of real estate as a distinct asset class and a foundational building block of a modern portfolio, rather than an alternative,” said Remy Briand, managing director and global head of research at MSCI. “GICS was developed as a means of standardization that would keep up with the evolving investment landscape.”

The change was first announced last spring. “The creation of an eleventh sector recognizes the growing importance of real estate in the world’s equity markets,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, in the announcement at the time. “The decision to add a real estate sector was based on extensive comments from investors and analysts as well as in-depth analysis and discussions between S&P Dow Jones Indices and MSCI.”

Of course, any change of this magnitude creates anxiety. “Unanticipated consequences are that people that are looking at the current financial index [are seeing] those returns have been enhanced by real estate,” noted Alexander Goldfarb, managing director and senior REIT analyst at Sandler O’Neill. “REITs will come out of financials, so the performance of the financial index can lose what had been a strong tailwind.”

Benzinga – Aug 2016

Meet This Year’s Best Real Estate ETF

Meet This Year's Best Real Estate ETF

The Federal Reserve’s refusal to raise interest rates to this point in 2016 coupled with investors’ seemingly unquenchable thirst for higher-yielding assets have created a perfect storm for real estate stocks and the corresponding exchange traded funds.

Additionally, real estate stocks and ETFs are getting increased attention ahead of the move, happening at the end of this month, that will see the group depart the financial services sector and become the 11th GICS sector. Obviously, those factors are benefiting US-focused real estate ETFs, but this year’s best-performing real estate is an emerging markets fund.

That honor goes to the Tierra XP Latin America Real Estate ETF LARE 0.33%, which as of August 9, is up 36.6 percent year-to-date. Said another way, LARE has posted better than double the returns offered by the largest U.S. real estate investment trust ETF.

Related Link: It Might Be The Perfect Time To Buy A Home: Here’s Why

LARE debuted in December and tracks the Solactive Latin America Real Estate Index.

“The Solactive Latin America Real Estate Index screens for all listed equities with primary listings in the Latin America region and which derive substantially most of their income from real estate and real estate services. The Index then uses dividend yield, market capitalization and liquidity in the underlying shares to determine weights. The Index is rebalanced quarterly,” according to Tierra Funds.

With Brazil being one of this year’s best-performing markets, emerging or otherwise, LARE may garner comparisons to traditional Brazil ETFs. However, such comparisons are inaccurate. Brazil and Mexico, Latin America’s two largest economies, combine for 96 percent of LARE’s weight, meaning the ETF is more a dual country/regional fund than a single-country ETF.

Said another way, with Brazilian stocks hot, LARE is not going to outperform a traditional large-cap Brazil ETF. Simple math confirms as much, but that doesn’t diminish LARE’s opportunity set. Certainly not at a time when yield is a primary concern for many investors.

For those that insist on labeling LARE as a Brazil ETF, notable are the facts that as of August 9, LARE is showing volatility that is about half that of the largest Brazil ETF and a dividend yield that is more than 340 basis points higher. Speaking of yield, LARE’s dividend yield is 5.58 percent, which is far superior to what investors will find on standard U.S. REIT ETFs.

Likewise, combining the dividend yields on the larges Brazil, Mexico and Latin America regional ETFs generates a number that is below LARE’s yield.

Year-to-date, LARE has outperformed all other LatAm ETF strategies with the exception of the benchmark Brazil ETF and the lone Peru ETF.

Forbes – Aug 2016

As Rio 2016 Kicks Into Full Gear, Can The Surging Bovespa Receive An Olympic-Inspired Bump?

With the exception of a few notable cases brought about by extraordinary circumstances such as the global financial crisis eight years ago, local stock markets in the host nation of the Summer Olympics have spiked noticeably in recent years while the eyes of the world have gazed upon their nation for the momentous event.

Over the last three decades dating back to the 1984 Los Angeles Summer Olympics, six of the last eight host countries have enjoyed a bump among their main stock indexes while the Olympic cauldron remained lit. Although the Shanghai Composite Index plunged nearly 8% during the 2008 Games as the global subprime mortgage crisis escalated, local stock markets have enjoyed substantial gains in three of the last five Summer Olympics. When Atlanta hosted the Olympics for the first time ever in 1996, the Dow Jones Industrial Average jumped 4.66% amid an explosion in commercialism, as a towering, 65-foot high Coca-Cola bottle dominated the backdrop of the Centennial Olympic Stadium.

The Bovespa Stock Index, however, presents a unique set of circumstances that neither economists, nor foreign policy experts have encountered in the history of the modern day Olympics. As the Rio Olympics kick into full gear this week, analysts will keep a close eye on fluctuations in the Bovespa, beginning with Monday’s session – the first since the Games began with a resplendent Opening Ceremony on Friday evening.

Despite a deep, prolonged recession and a string of corruption scandals that have rocked the nation’s executive and legislative branches, Brazil’s currency and stock market have staged an improbable rally over the last several months. The Bovespa, Brazil’s benchmark index, has already surged 33% year-to-date and is up more than 4,500 points since the lower house of the Brazilian Parliament voted to initiate impeachment proceedings against suspended Brazil president Dilma Rousseff on April 17. Meanwhile, the Brazilian real has jumped nearly 25% against the U.S. dollar since last October, as the global Emerging Market rout has eased and foreign investors have regained confidence in the Brazilian economy. As a result, Foreign Direct Investment inflows in Brazil soared over the first quarter, rising considerably from $13.1 billion to $17 billion on an annual basis.

The Bovespa could be the latest local stock index to enjoy a bump from the Olympics while the world’s top athletes converge in Rio (Richard Heathcote/Getty Images).

“What is unusual about Brazil is the fact that the stock market has done as well as it has in the months leading up to the Olympics. I think quite frankly it’s because of the political environment in Brazil,” said James P. Moore, Jr., managing director of the Business, Society, and Public Policy Initiative at Georgetown University’s McDonough School of Business. “It was at such a low base that once President Rousseff was effectively arrested and the new government came in, it gave some ability to calm the fears of not only the Brazilian people, but investors and others overseas, allowing for the stock market to take off in a way that you would not necessarily see in the history of other stock exchanges and host countries.”

With an estimated half-million foreign visitors expected to descend upon Rio over the next two weeks, a litany of stocks in the tourism sector could flourish before the flames are extinguished. Analysts will closely monitor transport stocks to gauge demand among airlines and rental car companies, as well as hotel occupancy for a comparison with vacancy rates two summers ago during the 2014 World Cup. Last week, Quartz reported that there were 27,137 hotel rooms in Rio de Janeiro for the month of June, representing a 37% uptick from 2012, according to research firm STR.

As the Atlanta Olympics illustrated, the Games have been synonymous with major international brands such as Coke, Samsung and Visa – each of which will maintain a significant presence in Rio. While many industry experts anticipate a boon for the household names, a number of Latin American analysts are more focused on the impact of the Olympics on leading Brazilian sponsors. Claro, the parent company of Brazilian telecom giant Embratel, will have its logo plastered throughout the net at the Beach Volleyball venue on Copacabana beach. Others like Brazilian beverage company AmBev, the fifth-largest brewery in the world, hope to grow their brand outside South America, as thousands of foreigners try the samba for the first time.

 

Barrons – Aug 2016

Reprinted from Barron’s

3 Brazil Headlines: Temer Fingered, Petrobras Sales, REITs Attractive?

The iShares MSCI Brazil Capped exchange-traded fund (EWZ) is up nearly 2% today, pushing the fund’s weekly performance well ahead of the 1% decline in the iShares MSCI Emerging Markets ETF (EEM).

Some of the headlines coming from Brazil:

Brazil’s interim President Michel Temer denied allegations that he had a part in a graft scheme at state oil company Petroleo Brasileiro or Petrobras (PBR), the country’s biggest ever corruption scandal. Petrobras shares are up more than 2% this week. The Wall Street Journal in a story today writes:

” … Temer denied the claims made in plea-bargain testimony by Sergio Machado, former head of Petrobras Transporte, or Transpetro, a fuel-transportation and logistics subsidiary. Mr. Machado has testified that in 2012 he organized, at Mr. Temer’s request, a donation of 1.5 million reais (about $432,000) from a construction firm to Mr. Temer’s political party, in exchange for Transpetro contracts. Mr. Temer dismissed the accusations as “frivolousness”… “irresponsible lies” …But the sweeping charges laid out by Mr. Machado may not be quickly or easily dispelled. They implicate some two-dozen politicians from seven different political parties …”

Meanwhile analysts project that Brazil officials will impeach President Dilma Rousseff by mid-August.

Petrobras, Brazil’s state-run oil company, received bids for a stake in its fuels-retailing unit BR Distribuidora in recent days, chief executive Pedro Parente said in his first television interview since taking the helm June 1, according to Reuters. He is trying to speed up the sale of assets — $14 billion in hoped-for divestments of oilfields, processing and distribution systems, power plants and other operations — to cut its $130 billion debt. See the Reuters story, Petrobras received bids for unit in recent days, CEO

Tierra Funds Jamie Anderson said in a prepared release that the U.S. Federal Reserve’s decision to delay an increase in interest rates provides “much needed breathing room” for emerging markets, especially China and Brazil. Tierra is  promoting a so-far small and illiquidfund it launched in December, the Tierra XP Latin America Real Estate ETF (LARE), which is focused on Brazil and Mexico real estate. Anderson the writes:

“Brazil’s central bank released its minutes Wednesday from its latest policy meeting and noted, among other things, that rate cuts will be on hold a little bit longer as inflation is still well above target levels. That said, year on year CPI has fallen from roughly 10.5% to 9.6% and the central bank believes we should see moderately lower CPI as we get into the summer season. We continue to view risk-adjusted yields from Brazil REITs as quite attractive and have noted above-average trading volume on many non-REIT real estate equities lately, which to us suggests that investors are positioning for what many expect to be a constructive second half of the year.”

The Tierra real estate ETF is up 16% this year, in line with the much larger and more diversified iShares Latin America 40 ETF (ILF).

CNBC Europe – Aug 2016

Olympics beset by inconveniences, not disasters