Global REITs Benefit from the 3Rs: Re-opening, Reflation and Re-calibration
PGIM Real Estate shares its views on the current economic environment and outlook for global real estate securities.
As COVID-19 vaccines rolled out, a resurgence of cyclical stocks drove a massive rotation out of growth stocks in the first quarter. Investors took profits in growth stocks to buy beaten-down cyclical stocks, pushing the latter towards pre-pandemic levels. With the big shift having taken place and little growth ahead, recent market activity is signaling that the cyclical rally may soon fizzle. Going forward, the tug-of-war between cyclicals and secular growth stocks should end as both start playing on level ground.
Valuation clouds linger. While strong market returns expanded valuations in 2020, profit-taking in many growth stocks has helped contract multiples. Some secular growth companies that posted stellar revenue and earnings growth during the pandemic will likely see more moderate growth this year (given the higher base), but still attractive growth rates going forward.
A spectacular dawn for secular growth on the horizon. As the world normalizes, we believe fundamentals will go back to leading stock returns. Companies with the most compelling fundamentals and strongest structural tailwinds are better positioned to prosper. Also, technology spending typically leads in recoveries, which should allow the sector to reassert its strength.
We’re not going back to the same world we lived in pre-COVID. Things will normalize, but there will be key differences in how we live, work, and operate as a society given how massively behaviors changed during the pandemic. We’ve learned to be more efficient through technology and that is unlikely to change. In fact, technology is now woven through every industry and being adopted at breakneck speeds. Below are a few tech-savvy areas that are seeing accelerating demand:
Domination of direct-to-consumer models. The most important driving force for consumers in the global economy is coming from the shift to direct-to-consumer (DTC) business models. DTC companies are gaining massive pricing and staying power as they know how to get the right products to the right consumers at the right time, making for seamless shopping experiences in both retail and online stores.
Fintech revolution rooted in digital payments. With the explosion in e-commerce activity, digital payment platforms that facilitate e-commerce sales are seeing surging demand. But the opportunity for these platforms extends far beyond just e-commerce, especially in emerging markets where these platforms are replacing the limited traditional banking in these regions. For instance, digital payment platforms are enabling off-line bill pay, asset management, and small loans—extremely valuable services that are scaling quickly and creating exciting investment opportunities.
Tectonic shifts in enterprise technologies. Cloud-based applications and services are set to be the biggest transformation for enterprises since the advent of the internet. Just as the power and reach of the internet was severely underestimated, so too is the business-changing potential of cloud businesses.
The electric vehicle frontier. The transportation industry is on the brink of a new era as electric vehicles (EV) are poised to turn century-old internal-combustion-engine vehicles into relics in the coming decade. Where traditionally, consumers needed to purchase new vehicles to get the latest technologies, EVs are now being built with components that can be turned on through software subscriptions to enable features like autopilot. This will help reduce the up-front cost of the vehicle while creating recurring revenue streams. As the industry grows, so too will demand for electric batteries, smarter semiconductor chips, and mobility services, providing investors will multiple ways to invest in the EV theme.
Position for the release of huge pent-up demand. As economies reopen, there will be soaring demand for things like travel, tourism, and restaurant dining. The team has increased exposure to areas that can help capitalize on that demand.
Find open-ended growth. While cyclical stocks may have their day in the sun, the team sees much more compelling opportunities in secular areas of the market that will have sunny skies for years to come with sky-high growth potential given their transformative impact on our daily lives.
For Professional Investors only. All investments involve risk, including the possible loss of capital.
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