Five weeks on, and no more mid-sized US banks have collapsed. No more large Swiss banks have folded, either. Energy prices have started to fall. Food price inflation may be moderating. The talk now is increasingly of falling interest rates, not rising interest rates. And the consensus view appears to be the UK economy isn’t going to contract in the months ahead, after all.
What’s more, relations between the UK and the European Union seem a lot less combative, too. The grown-ups are in charge, and common sense is starting to prevail. For an island-based economy that’s heavily dependent on trade inflows, that is welcome news.
And as if on cue, Deloitte’s quarterly survey of finance directors has recorded a sharp uptick in optimism — the biggest uptick since the Covid vaccine rollout, apparently. Finance chiefs are still cautious, seems to be the message — but cautiously optimistic.
So should investors commit fresh funds to the stock market?
Not one question, but two
In my years of investing, I’ve seen such moments before.
And the question of whether to commit fresh funds to the market is really a question with two halves. Is it the right thing to do? And which stocks are looking cheap?
Now, you might imagine that those two questions need considering separately, with the first one being considered first. After all, what’s the point of researching cheap shares if you’re not going to invest?
But in this case, it’s not that simple.
Greater appeal, greater risk appetite
And that’s because questions such as “Is committing fresh funds to the market the right thing to do?” very rarely have clear-cut, cut-and-dried answers.
In point of fact, in recent times I’ve seen a situation that clear-cut only once: in February 2009, when I switched an entire stranded gilts-based Equitable Life pension into stocks, with another provider.
Essentially, questions such as “Is committing fresh funds to the market the right thing to do?” always has an element of uncertainty, if not outright doubt.
But if shares are looking really, really cheap, then I’m prepared to take a commensurately greater amount of risk.
Two sectors that are looking cheap
And right now, while the Footsie is tantalisingly close to the all-time highs that it reached in mid-February — before banks began imploding — there are plenty of shares that aren’t particularly cheap.
At least, not by comparison to their recent histories. (Compared to international markets, though — markets such as Asia, America, and some European markets — the UK market as a whole is screamingly cheap. That, however, is a story for another day.)
But two sectors stand out. First, hospitality — pub chains, entertainment, hotels, that sort of thing. And second, Real Estate Investment Trusts, otherwise known as REITs, and similar property companies (not every property company is a REIT).
Now, hospitality is undeniably cheap. But it’s facing an awful lot of headwinds: energy prices, foodstuff inflation, depressed demand thanks to cash-strapped consumers hit by the cost-of-living crisis, and so on.
Property faces fewer headwinds — and those are easing
Property, though, looks cheap and is facing far fewer headwinds.
And the biggest of those headwinds — sharply rising interest rates — could well be disappearing. High interest rates adversely affect new asset values, and also hit leveraged REITs with higher interest costs. And most REITs, it’s fair to say, are leveraged: debt ratios north of 30% are common. So tanking share prices haven’t been too surprising.
Other headwinds are lessening, too. Fears of a recession are easing, for instance.
And the much-heralded “death of the office” now seems a little over-stated — and in my own case, many of the property companies that I most prefer have little exposure to offices, anyway.
Shares I like
Shares such as Warehouse REIT, which invests in warehouses, for instance. Primary Health Properties, which owns and rents out doctors’ surgeries. Aberdeen European Logistics Income, which invests in large warehouses in Europe. Tritax Big Box, which does the same here in the UK. LXi REIT, which owns and rents out a mixed portfolio on long index-linked leases. Empiric Student Property, which rents out upscale student accommodation. And Supermarket Income REIT, which owns supermarkets.
And so on, and so on. Many such REITs are looking oversold.
Is committing fresh funds to the market right now the right thing to do? I don’t know. The runes, as ever, are difficult to decipher. But in the case of commercial property, I’m increasingly minded to take the risk.