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Our regular summary of the capital markets. Check back each month for new updates.

Smart Money

October 31, 2021

The Big Four: Bigger, Stronger, Wealthier (?)

Smart Money

The total value of the global sports market is estimated to be greater than $600-billion, making it among the most lucrative entertainment industries in the world. Specifically, North America’s professional sports revolve around its four major leagues; the NFL, NBA, MLB, and NHL. As each league looks to rebound after an impactful pandemic, GAVIN has reviewed their revenue, growth and ...

The total value of the global sports market is estimated to be greater than $600-billion, making it among the most lucrative entertainment industries in the world. Specifically, North America’s professional sports revolve around its four major leagues; the NFL, NBA, MLB, and NHL. As each league looks to rebound after an impactful pandemic, GAVIN has reviewed their revenue, growth and value, in addition to future plans to aid their recoveries.

Comparing North America's Pro Sports Leagues

October 28, 2021

The company formerly known as Facebook falters while markets rally

Market Recap & Boxscore

Markets re-established their 2021 uptrend in October, led by the S&P 500 Index, rising 5.2%, as of 27-Oct-21, as it hit a new all-time high. The TSX Index was not far behind, as strength in energy and financials contributed to a 5.1% gain for the month. The MSCI World Index lagged but still managed to pop 4.6% during the month. Commodities continued to march higher, with the CRB C...

Markets re-established their 2021 uptrend in October, led by the S&P 500 Index, rising 5.2%, as of 27-Oct-21, as it hit a new all-time high. The TSX Index was not far behind, as strength in energy and financials contributed to a 5.1% gain for the month. The MSCI World Index lagged but still managed to pop 4.6% during the month. Commodities continued to march higher, with the CRB Commodities Index climbing 4.0%. WTI Oil surged 11.2% and breached $85 for its first time since 2014. Rates initially appeared to extend its uptrend, with the 10-year U.S. Treasury yield rising from 1.52% to 1.70%, but a late rally in bonds helped bring the long-end back down to even. This event similarly reversed some of the small cap outperformance over technology that started the month. Gold rose 3.4% and continues to be range-bound.

It was interesting to observe the aggressive moves in stock benchmarks without corresponding strength in the FAANG names. The only name to outperform the S&P amongst the five was Netflix, posting a 12.7% gain in October on strong earnings and subscriber growth which beat analyst expectations. (Thank you, Squid Game!). The biggest laggard of the group continues to be Facebook, down 10.9% in October and 14.8% over the last three months. There has been no shortage of narratives to justify the fall, and likely much of this started back in April when Apple announced iPhone privacy changes that would prevent advertisers from tracking iPhone users without their consent. It is no secret that FB’s bread and butter has been their ability to track and personalize advertisements, and without the ability to do so, the appeal of FB for marketing spend has subsided. Their third quarter results showed the company missed expectations on advertising performance. Further, FB announced a massive capital spending program to fund growth initiatives like AR/VR and their foray into the metaverse, which starts to introduce some thesis creep into the bull case. It is worth noting that supply chain issues are also potentially affecting the company’s results. There is less incentives for product vendors to spend on advertising without goods to sell. In any case, doubts about FB’s growth forecasts are certainly emerging.

The third quarter earning season has begun and the market’s reaction to the reported results has been noteworthy. A selloff in the reporting company’s stock price has largely been the outcome even for those who beat expectations. While the bull trend remains intact, we will be monitoring a couple of factors to gauge the rally’s vigour; (1) the relative strength of large cap tech, and (2) if price momentum fades despite top and bottom-line results that substantially beat expectations.

Rates and inflation remain top of mind for investors. Globally, long-term yields have risen and breakeven inflation rates have moved to levels not seen since we exited the Global Financial Crisis. Accordingly, the U.S. Federal Reserve’s actions will garner massive attention. Decision makers greeted early signs of inflation from November 2020 through to mid-2021 with confidence that price increases were transient. However, more recently, commentary suggests that secular inflation fears are mounting. Meanwhile, the Bank of Canada cited “higher energy prices and pandemic-related supply bottlenecks now appear stronger and more persistent than expected.” As a result, they declared their intention to start lifting rates quicker than anticipated. The Bank is also ending its QE program which originally purchased C$5 billion of government bonds per week. The challenge for policy makers and investors is to process the sustainability of better-than-expected growth with higher-than-expected prices.

October 15, 2021

Real Estate as an Asset Class

Third Quarter 2021 Newsletter

September Effect Hits Equities – North American equities were mixed for the third quarter, giving back most of their gains in September. The S&P 500 was the leader for the quarter with emerging markets struggling mightily as China slowed and global COVID case counts increased. The often-discussed September Effect caught up with equities. Since 1929 the S&P 500 has lost 1.0% on...

September Effect Hits Equities – North American equities were mixed for the third quarter, giving back most of their gains in September. The S&P 500 was the leader for the quarter with emerging markets struggling mightily as China slowed and global COVID case counts increased. The often-discussed September Effect caught up with equities. Since 1929 the S&P 500 has lost 1.0% on average during September versus a +0.8% for all the other months.

Bonds also gave investors something to worry about as equity market weakness coincided with bond price declines. After falling to a closing low of 1.17% in August, the US 10-year Treasury yield finished the quarter at 1.49%. Despite a rising US dollar, crude prices made their way back to cycle highs also by quarter end. Rising yields and commodity prices are following inflation numbers higher which is happening across the globe.

Investment Opportunities Within Real Estate – The global real estate market can be classified into two broad categories: residential, where lots or dwelling units are owned, and commercial, which are income generating assets. Commercial real estate includes offices, industrial, healthcare, retail centers, hotels and multifamily rental apartment properties. Other forms of real estate-related investments are real estate-intensive operating companies, real estate investment trusts, loan pools and real estate debt. Investors exploring opportunities in the asset class have many options that offer a range of benefits and risk-return profiles.

Some of the benefits of investing in real estate include attractive total returns, portfolio diversification, inflation hedges and downside protection. The necessity function of real estate creates consistent cash flows that often lead to strong returns. According to the NCREIF Property Index, returns for real estate over the last 15 years were 6.85% annually versus 10.5% for the S&P 500. While these figures may surprise investors, the diversification and inflation benefit of real estate investing make it an attractive asset class for all types of investors.

Real estate, specifically private real estate, has historically displayed low correlation relative to stocks and bonds. Furthermore, as a real asset, property markets typically rise in inflationary periods. This is particularly true for short-term lease contracts as rent resets can be negotiated more often. Public storage is an example of a short-duration lease because rental contracts are typically monthly.

While fiduciaries and institutional investors are aware of the diversification and inflation protection benefits of real estate, most investors are attracted to the return potential. As previously illustrated, the returns are misleading, which is due to the use of leverage. As a large, mostly stable asset, lending is required and accepted widely. Therefore, when appreciation occurs, the benefits to equity can be significant. For example, if a $1,000,000 home appreciates at the average NCREIF Property Index rate of 6.85%, it’s leveraged return jumps to 11.42% if it carries a reasonable 40% mortgage.

Avenues to invest in real estate include both debt and equity (ownership) opportunities across private and public markets. The most common equity investment option, also the most liquid, is the real estate investment trusts (REITs). These are often diversified, well-capitalized properties that generate cash flow that is passed on to investors. The downside of this option is the high correlation to traditional equities. On the other side of the liquidity and correlation spectrum is direct investments. The challenge with this strategy is that it requires on-the-ground personnel in target markets and in-depth knowledge of regulations, deal flow and access to capital. A good middle ground that investors are often unaware of is through private real estate investment funds. This strategy can provide slightly more liquidity than direct holdings and it requires far less expertise of the asset. To ensure professional assessments and/or opportunities are maintained a portion of the return is foregone as a service.

Real estate investing has produced solid returns for investors as interest rates have fallen for nearly 30 years. This remains the number one driver for the asset class as a whole. Returns however should be viewed through an unlevered lens (take away leverage) and for most investors, retaining experts to assess the merits of local markets is a good risk mitigation strategy to protect capital. Our partners remain steadfast and operate in growing, diverse economies for our commercial investments while diversification is enhanced through our farmland allocation.

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Gavin Hockey Wealth Specialists
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