A Constructive View on Growth Stocks
Jennison Associates views growth stocks capitalizing on big secular trends as positioned for prominence amid unsettled broader earnings conditions.
Rick Romano, Head of Global Real Estate at PGIM Real Estate, highlights historic parallels in valuations as reason to look upon current conditions for REITs as a source of compelling buying opportunities.
REIT fundamentals remain resilient amid elevated macro concerns at a time when REITs should stand out due to their inflation-hedging characteristics and limited supply-chain exposure. Adding to their appeal, many REITs trade at historically deep discounts to their NAVs, offering investors opportunities to use public markets to gain exposure to real estate assets at prices well below their private market value. Conditions favor REITs that benefit from defensive demand likely to drive continued top-line growth as broader economic trends decelerate. That includes needs-based shelter, such as health care facilities and multifamily apartments, where demographics and market dynamics influence demand more than economic conditions.
Limited exposure to inflation is another attractive attribute. Properties with triple-net leases, where most of the burden of higher costs is borne by tenants rather than landlords, fall into that category. Self-storage facilities are also appealing because they require little in terms of labor, largely insulating them from wage inflation.
From a valuation perspective, market volatility leaves REITs looking overshot to the downside relative to the value of real estate assets they hold, creating an attractive arbitrage opportunity. The situation is likely to spur M&A activity, with U.S.-based buyers positioned to bargain hunt via cross-border transactions due to the strength of the dollar.
Many of the risks that rattled investors in 2022 remain unresolved entering 2023. The economic implications of the fight against inflation are still unknown. Inflation risk remains especially elevated in Europe due to potential energy and supply-chain disruptions. Moreover, interest rates make refinancing a costly proposition: Companies forced to refinance at today’s higher rates will pay the price in the form of lower earnings.
Risks—Investing involves risks. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic uncertainties. Investing in emerging markets is very risky due to the additional political, economic, and currency risks associated with these underdeveloped geographic areas. Investments in growth stocks may be especially volatile. Value investing involves the risk that undervalued securities may not appreciate as anticipated. It may take a substantial period of time to realize a gain on an investment in a small or midsized company, if any gain is realized at all. Real estate investment trusts (REITs) may not be suitable for all investors. There is no guarantee a REIT will pay distributions given the inherent risks associated with the market. A REIT may fail to qualify as a REIT as defined in the Tax Code, which could affect operations and negatively impact the ability to make distributions. There is no guarantee a REIT’s investment objectives will be achieved. Diversification and asset allocation do not guarantee profit or protect against loss. Investments in in Master Limited Partnerships (MLP) and MLP-related investments are subject to complicated and in some cases unsettled accounting, tax, and valuation issues, as well as risks related to limited control and limited rights to vote, potential conflicts of interest, cash flow, dilution, and limited liquidity and risks related to the general partner’s right to force sales at undesirable times or prices. MLPs are also subject to risks relating to their complex tax structure, including losing its tax status as a partnership, resulting in a reduction in the value of the MLP investment. Many MLP investments are in the energy sector and subject to a greater degree to risk of loss as a result of adverse economic, business, regulatory, environmental, or other developments affecting industries within that sector than investments more diversified across different industries. Diversification and asset allocation do not guarantee profit or protect against loss.
The views expressed herein are those of investment professionals at PGIM Real Estate at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice. PGIM Investments LLC is a registered investment advisor with the U.S. Securities and Exchange Commission. PGIM Custom Harvest does not provide tax, legal, or accounting advice. This material is for information purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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