There’s been a pronounced shift in financial media coverage of late.
The perennially pernicious punditry is shifting coverage from high-flying tech stocks over to an area of the market that has long been left for dead…
Value.
Source: CNBC
After the past decade driven by growth, it almost makes me a little nauseous even typing it.
But after a full week’s worth of articles dedicated to slowing growth in U.S. gross domestic product over the course of 2022, it’s probably a word I should get used to.
And honestly, the market itself has been screaming at us to pump the brakes this entire quarter. Now it’s time for us to shift to the best sector for 2022… It’s not what you think.
Take a look at the best performing sectors over the past month…
Source: Bloomberg
Consumer Staples… Utilities… Health Care…
These are not sectors that outperform when the economy does well.
Actually, it’s quite the opposite.
But the one that absolutely smoked all of ’em also smoked ’em for the entire quarter.
In fact, outside of Energy, it was the second-best performing sector in the entire market.
Source: Bloomberg
Real Estate.
Now, under normal circumstances, that isn’t a sector that “crushes it” in an inflationary, hyper-growth economic environment. But in this environment, it’s the best sector for 2022.
The statistical outlier that was March of 2020 pushed down on Real Estate so hard it was like pushing a ball underwater…
Whenever you let go, it rockets upward.
We have seen that play out in real time with housing prices. Other than a brief dip at the beginning of 2020’s lockdown, the Case-Schiller U.S. National Home Price Index has risen at the fastest rate in its 34-year history.
Source: Bloomberg
The culprit, of course, was the combination of all-time-low interest rates with all-time low inventories.
Source: Bloomberg
And although we may see this trend slow to some degree in certain markets over the course of 2022, other markets — and other sub-sectors — will likely be picking up.
That “search for equilibrium” becomes clear when we look at 2021’s returns on a more granular basis.
Source: Fortune Research, Bloomberg
Trading the Best Sector for 2022’s Conditions
Self-storage REITs — companies like Public Storage (NYSE: PSA) and Extra Space Storage Inc. (NYSE: EXR) — were by far the biggest gainers in 2021, with residential, industrial, specialty and retail REITs all relatively fairly close behind.
What do all these have in common?
They were all DOWN in 2020… hence the smaller two-year returns.
Similarly, mortgage finance REITs — which were up big in 2020 — is the only subsector to post a negative return for 2021.
So, as we look forward to the best sectors for 2022, we should take a similar, contrarian approach. Or as I often like to say, “buy ’em on red and sell ’em on green.”
In this case, that probably means taking an approach similar to the other “defensive” pieces I wrote this week on volatility/bonds and gold.
Investing in real estate is similar to investing in bonds, in a sense. Both asset classes have a relatively long duration, from one-year residential to multi-year “triple-net” leases where the lessee assumes expenses like property taxes and insurance.
On the short-term side, residential REITs that have outperformed this year — in regions like the southwest and midwest — will likely take a backseat to major cities as the threat of COVID-19 wanes.
Similarly, long-term triple-net leases that lagged in 2021 — like mall, shopping center and restaurant REIT’s — will begin to catch up on a rate-of-change basis.
Finally, office and hotel REITs, which have been left for dead in this market, should see a comeback as day-to-day life and travel returns to something that resembles “normal.”
The advantages for your portfolio are obvious. These are low-volatility, higher-dividend stocks that won’t draw down substantially.
But in a year that will prove to be a difficult “stock picking” environment, this sector is as close to a sure thing as we’ll get in 2022.
Markets are open on Monday, but it’s a rare holiday for me. As such, our usual publishing schedule will be pushed back a day, so watch out for the weekly outlook in your inbox on Tuesday.
But above all, best wishes to you and yours for a safe and incredibly Happy New Year!
All the best,
Matt Warder
Fortune Research
