Real Assets
The Valuation Opportunities Across Real Asset Equities
Article
Nov 10, 2022
For equity investors, there have been few places to hide this year. Even after stocks’ strong performance in October on expectations of a Federal Reserve pivot, global equities were still down roughly 20% in 2022 through month end—and listed real assets have not been spared from the suffering. The good news, however, is that this year’s selloff has created a number of compelling valuation opportunities across real asset equities, in our view.
Based on our analysis, both real estate and infrastructure equities are currently trading at attractive valuations relative to historical levels. We find global real estate securities currently trade at an approximate 26% discount to net asset value (NAV), while U.S. real estate equities trade at a roughly 19% discount. Both discounts are much wider than the long-term averages of a 3% premium and a 6% discount, respectively. From a sector standpoint, all U.S. real estate sectors currently trade below their historical valuation ranges. Among infrastructure sectors, the story is not as uniform, yet we find most sectors are trading in the bottom half of their historical valuation ranges. See the charts below.
In order for equities to recover, we believe the market needs to see peak inflation and a trough in corporate earnings. We are already seeing early signs of an inflation apex in forward-looking gauges—and we expect a rally is ahead in 2023 once we see corporate margin declines bottom out.
In the meantime, against today’s inexpensive backdrop, we favor attractively valued sectors where we expect to see the best risk-adjusted returns. Within real estate, for instance, we see compelling opportunities in U.S. residential stocks, which we expect may benefit from the relative affordability of renting vs. buying amid higher rates and the underdevelopment of housing supply. In contrast, we believe it’s too early for a broad overweight exposure to the inexpensive office sector, given the question marks around the return-to-office trend.
Within infrastructure, we find valuations in communications more compelling after the recent selloff, while rising fuel prices keep us underweight transports despite attractive valuations. Above all, we believe an active approach is key for accessing today’s—and tomorrow’s—valuation opportunities, given its capacity to dynamically adjust exposures at turning points in the market.
Read more in the full Real Assets Monthly.
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