Summary List Placement
Even though financial stocks have outperformed in recent months, their run is just getting started as this year is likely to experience the fastest GDP growth in decades, a steeper yield curve, and continuously accommodative monetary policy.
That’s the outlook according to Julian Emanuel, the chief equity and derivatives strategist at BTIG, who said in a recent client note that this unique market environment is unprecedented in many ways.
He says the pandemic triggered “seismic shifts” and created higher volatility in yields, the economy, and equity markets. That means that there is a higher probability of inaccuracy in macroeconomic forecasts, and predictions in the coming months have a greater chance of having either upside or downside errors.
However, financials stand to benefit from this environment, as higher uncertainty has created opportunities for excess returns within the fintech, mortgage and specialty finance, homebuilding, and REITs industries.
Within the fintech space, Emanuel and his team are bullish on names whose offerings saw a surge in demand brought about by the pandemic as they expect further demand to push growth for years to come, he said.
The fintech space saw years’ worth of digital disruption during COVID, as lockdowns and work from home lifted demand for digital payment methods and wallets. These types of consumer-behavior changes brought about by the pandemic may be permanent, he added.
“These and other FinTech stories have not been tarnished by rising interest rates; instead, the secular trends driving their growth have been intensifying, creating buying opportunities for investors with investment horizons measured in quarters and years.”
Also not being affected by rising rates are homebuilder stocks. Despite rising rates, the average builder has gained 27% year-to-date thanks to strong new order growth and accelerating earnings-per-share growth, he wrote.
In fact, history shows that consumers jump into the housing market when they expect interest rates to rise.
“Eventually, if rates continue to rise, or if they stabilize higher, demand drops as more consumers view rates as too high,” he said. However, he added that they were not seeing such a move yet as of January.
And if the 10-year yield moves to 1.7% by year-end (it traded around 1.65% on Friday), Emanuel and his team recommend getting a hold of cyclical real-estate investment trusts. Those include malls, hotels, and coastal apartment REITs, all of which stand to benefit from the economy’s reopening after shutdowns and teleworking mandates kept people at home for months.
Even if the 10-year rate exceeds 1.7%, the “traditional cyclical REIT playbook should continue to outperform,” he added.
The same applies to the commercial real estate lending market.
Even if the 10-year hits 1.7% by year-end, the CRE lending market could still be supported by low long-term interest rates and an attractive yield.
“Given the lack of yield (globally), we expect a low-interest rate environment, coupled with an improved macroeconomic outlook, should attract investment in U.S. CRE and support property valuations – a positive for transaction activity and transitional loan pipelines.”
Having spotted the drivers of outperformance within these spaces, Emanuel and his team listed the 30 stocks …read more
Source:: Business Insider