Thursday, May 06, 2010

Asset Class Returns As At end-April 2010

April was relatively uneventful for the major asset classes in terms of total returns—with one exception. REITs scored another outsized gain last month, posting a strong 7.7% total return, based on the MSCI REIT Index. Real estate securities are also far ahead of the pack for 2010 after advancing by nearly 18%, or about twice as much compared to the next-best performance for U.S. stocks in the year-to-date ranking.

The fact that almost all other asset classes were flattish indicates that investors are probably equally bearish and bullish at the same time. Despite the troubles in Euro zone, all asset classes are like marking time. Safe to say that a large number of investors have stayed in cash for the time being but not totally out of it as it could very well rise another 10% from here for no apparent reason.

As I have said a number of times, its prudent to stay about 70% cashed up for the next month or two. The World Cup in June is not likely to bring much activity in all markets bar the US, as soccer still does not wield the delirium there that the rest of the world go through willingly.

In the wake of the price surge in real estate recently, the yield on equity REITs fell to 3.49% as of April 29, according to data from the National Association of Real Estate Investment Trusts. That’s slightly below the 10-year Treasury’s 3.76%. Is that a sure sign that REITs are set to correct? No, although it raises the risk in the asset class.


It’s worth noting that in the past, when the equity REIT yield overall dipped below the 10-year Treasury yield, it’s signaled rough times for real estate stocks. During 2006 and 2007, the yield on the 10 year exceeded the REIT yield. After REIT prices were crushed in 2008, the yield premium over Treasuries soared, reaching more than 7 percentage points over the 10 year in early 2009.Hence you may safely take REITs out of the performing asset classes by next month, and you are basically left with nothing positive, really.

Despite the lush levels of liquidity in the global system, commodities are still working off inventory. That does not bode well for growth emerging markets. Its a standoff for a couple of months.

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