Every act of creation is first an act of destruction.
-- Pablo Picasso
One of the more underreported stories in the past several months
has been the knock-on effects of taper talk on REITs (real estate
investment trusts). The appeal of these investments relates
primarily to the high yield they offer, as money flocks to such
stocks when expectations for falling rates rise. They also provide
a relatively liquid way of getting exposure to an illiquid asset
class. As rates were falling, particularly on the longer duration
side, REITs were bid up to valuation levels that were largely
illogical. As of June 28, for example, the price-to-earnings ratio
iShares US Real Estate ETF
(NYSEARCA:IYR) was 43.11. Hardly a value play at that point.
More so than that, though, on a relative basis, they have gotten
crushed. Take a look below at the price ratio of the iShares US
Real Estate ETF relative to the
SPDR S&P 500 ETF Trust
(NYSERCA:SPY). As a reminder, a rising price ratio means the
numerator/IYR is outperforming (up more/down less) the
denominator/SPY. A falling ratio means the opposite.
Taper talk began in mid-May, causing a sharp relative decline and
subsequent crash, with all outperformance over the last three years
erased in a matter of months. Is this justified? Maybe; maybe not.
I could easily argue that this was a long time coming given
valuations... but by the same token, I maintain my belief that
taper fears are way overdone, given persistent deflationary
pressure in terms of the lack of demand-pull and cost-push
inflation. A rebound can happen for a trade, but the cat is out of
the bag. It takes time for such a massive collapse in relative
performance to get undone.