It’s a head scratcher alright. Over the past six months the ASX All Ordinaries index is up 9.37% while the ASX 200 index is up 8.56%. Despite recent negative headlines stocks are still higher than they were last August.
The same cannot be said for property trusts, or Australian Real Estate Investment Trusts (AREITs). The S&P/ASX 200 A-REIT index is up 6.30% over the same period, underperforming the wider market by 2.26%.
Investors and advisers might ponder the disparity and wonder whether it will continue. Understanding the three major reasons for the relative weakness in AREIT share prices over the last six months will help address the dichotomy.
1.Growth stocks are getting all the love
You could say that growth stocks have been flavour-of-the-month for months now. This has come at the expense of interest in lower risk, income investments like REITs.
Whilst it’s impossible to say with certainty, the so called ‘Trump Trade’, based on cash flow boosts to US corporates from lower tax rates, together with an expectation of higher wages and consumer spending, is driving positive sentiment in high growth and cashed-up businesses.
As in Australia, US REITs haven’t benefited from this positive sentiment. For the 12 months to January this year, returns for US REITs (as measured by the MSCI US REIT Index) have been negative at -2.49% against the local AREIT market return of positive 8.08%. It isn’t just in Australia where REITs are being left behind.
2. Bond yields have risen strongly
The chart below shows the yield on 10-year US bonds. With bond prices falling, in the past six months the yield has risen from a low just above 2% in early August to 2.92% as at 22nd February, 2018. US bonds are selling off due to expectations of higher short end rates and stronger economic growth. In Australia, 10-year bonds have also appreciated, although not by as much.