Editor’s Note: Welcome to the June Edition of The REIT Sheet, with current buy/hold/sell advice for our updated databank of 88 individual REITs. Don’t forget our monthly
webchat is June 29 starting at 2 pm. It’s your opportunity to ask about any and all REITs, including any I’m not covering here. Thanks for reading!

So far this year, the benchmark iShares US Real Estate ETF (NYSE: IYR) is underwater by nearly -21 percent. That’s an even worse performance than the largest, most efficient ETFs set up to track the S&P 500, which the popular investment media now proclaims is in a bear market.

In my view, every real bear market in stocks has two salient features. First, losses destroy enough wealth to hit the broad economy. And second, the losses are long lasting enough to cause a meaningful change in investor behavior.

The Financial Crisis and subsequent so-called “Great Recession” of 2007-09 certainly qualified on both counts. So did the bear market that preceded it, which lasted from early 2000 through early 2003.

What we saw in spring 2020 most certainly did not. Mainly, though broad sectors of the economy struggled in the wake of steps taken to control the pandemic, stocks’ steep losses of late February and early March were entirely erased less than two months later. And the only lesson investors “learned” from the experience was to resolutely
buy dips.

What we’ve seen so far this year doesn’t really qualify either, though it certainly could in coming months…

The Information Age has transformed the impossible to the possible and even likely. But even the most sophisticated 3-D printer can’t create out of thin air the metals that are essential to the transforming 21^st century global economy. And therein lies the long-term bull case for key resources from iron ore and copper to lithium, nickel and battery materials.

We don’t expect the Chinese economy to deliver the “around 5.5 percent” economic growth rate that the country’s leadership had hoped for this year. In fact, the country’s GDP growth should be at least a percentage point lower, even if there are no further negative surprises.

When it comes to metals demand, nothing is as vital as the health of the Chinese economy. And this year, the country’s lockdowns to control a suddenly acute wave of COVID-19—especially stepped up restrictions imposed in Shanghai and neighboring cities—are already taking their toll on both the domestic economy and industrial production.

At this point, it looks like Chinese authorities will stick with the “Zero Covid” strategy for the foreseeable future. The main reason is it’s become clear that Shanghai’s attempt to deal with the outbreak in a more “surgical” way did not produce the desired results.

To put what’s happening in perspective for metals demand, Shanghai is a city of 25 million people and China’s financial center with the busiest port in the world. The cities adjacent to it are the world’s most important manufacturing hubs for a wide range of vital components for a massive range of products including all things electronic.

Editors’ Note: 2021 was a great year to be invested in stocks. But can investors expect a repeat of last year’s gains with inflation on the rise, the coronavirus raging again and the US Federal Reserve apparently ready to start tightening again? Here in brief is our roundtable discussion of how we editors of Capitalist Times see the big picture this year. We hope you enjoy it! Also, please make plans to join us at this month’s live web chat on Thursday January 27, starting at 2 pm.

Q: 2021 was a big year for stocks. Can 2022 possibly measure up?

Roger Conrad (RC): I think it’s unlikely the S&P 500 will approach the 28.5 percent total return we saw in 2021. It’s true that valuations are not a great tool for market timing. But the higher they are, the more difficult it is for actual developments to live up to investors’ expectations, which are extremely high right now.

Highlights

• Currencies around the world are being debased as central banks increase money supply to stimulate economies. This is a strong positive for hard assets.
• There’s a lack of visibility in the Chinese policy making process. China is the world’s largest market by far for most metals, making sector investing a tricky game short-term.
• The Chinese economy has slowed from its immediate post-pandemic recovery pace. That makes demand for steel, iron ore, copper, and aluminum highly uncertain for at least the next three months.
• Global Electrification is driving demand for a wide range of metals, particularly those used in batteries. That has strongly bullish implications for copper, nickel, aluminum, lithium and steel as the main drivers of global decarbonization.

I’m going to start this issue with a simple-yet-powerful chart. In fact, as I’ll show you in just a moment, this one chart has “explained” about two-thirds of stock market returns since January 1949. You could say it called the “Lost Decade” for US equities from 2000-10, a decade when the S&P 500 fell 9.75% even including dividends. And it flashed a warning sign for stocks back in the late 1960s, ahead of the stagflation of the 70s and negative inflation-adjusted real returns from equities. Here’s what really has me worried – this indicator currently projects stock market returns of just over 2.4% annualized for the coming decade.

Don’t forget, that’s in nominal terms – with headline inflation running +4.3% in the month of August 2021, the highest in 30 years, I believe your actual, real returns from owning stocks could be negative over the next 7 to 10 years.

Sticking to Strategy in a Market Meriting A Bit More Caution

The Macro:

The S&P 500 is up more than 18% year-to-date and the largest correction so far this year has measured just 4.2% from closing high to closing low. However, the broader market isn’t as healthy as it might seem since market breadth has been deteriorating since early June and the rally is increasingly powered by a handful of large-cap technology and growth stocks.

Historically, rallies on deteriorating market breadth such as we’ve seen this summer end with at least a modest market correction.

Narrow market breadth also reflects a rotation out of value stocks and small caps, which led the market higher for the first 5 months of the year. Since value shares and small caps are considered more economy-sensitive and cyclical, this rotation signals the market is in the throes of a classic growth scare this summer.

Mining is an expensive business: The annual tab for producing the copper, iron ore, nickel, rare earths and other vital resources needed to run the world is estimated at $1 trillion. It’s also a highly capital and energy intensive industry that leaves significant environmental and climate footprints.

That makes cost control a critical element of mining companies’ success. And finding new ways to improve operating efficiency and diminish environmental impact is a central objective of management teams around the globe, especially for the large global mining companies that increasingly dominate this business with scale.

Deep Dive Investing members know the view here: These companies have dramatically improved environmental practices in recent years. And as the hunt for the growing pile of dollars invested on environmental, social and governance criteria heats up, they’ll continue the push, which will remain the main way of extracting resources from the earth in order to fuel economic growth, green or otherwise.

If you haven’t hit the road yet this summer, take my word for it. After a year of pandemic-related lockdowns, Americans are on the move again with a vengeance. And so are the real estate investment trusts that own the restaurants, resorts, hotels, casinos, campgrounds and other properties we’re now frequenting is growing numbers.

Americans on the move are also turning the spotlight on infrastructure, from roads and bridges to giant wireless towers, data centers and renewable energy generation facilities. And increasingly REITs are major players there as well, sharing the wealth with investors as generous, safe and rising dividends.

At first blush, the May Employment Situation report released by the US Bureau of Labor Statistics (BLS) on Friday looks weak with total non-farm payrolls up +559,000 compared to the +675,000 the consensus had expected before the report.

However, while that’s a big miss in absolute terms – 116,000 fewer jobs than expected – it pales in comparison to the magnitude of the April shortfall when the US created more than 700,000 fewer jobs than economists had expected.

Moreover, as I’ve explained in prior issues, the BLS Employment Report is prone to large subsequent revisions, so it’s quite possible this month’s “miss” could be revised away over the next few months as more complete data comes available.

In addition, last year’s coronavirus-related business disruptions are wreaking havoc with BLS’ seasonal data adjustments. As I noted, BLS reported that US non-farm payrolls grew by 559,000 in May; however, the raw data shows the US actually created +973,000 jobs last month.

President Biden’s infrastructure plan has been revealed, and now Congress will have its say. As we noted here almost a year ago, an infrastructure plan has been on everyone’s agenda, with the main disagreement being how it would be financed. The secondary issue was what part of the infrastructure was to be improved or build anew.

As expected, the Biden plan is to be financed from higher corporate and other taxes. The plan has also modernized and expanded the definition of infrastructure as was understood until now. The chart below shows the breakdown of how the money is to be spent.

According to baseball legend Yogi Berra: “Forecasting is very difficult, especially when it involves the future.”

That certainly rings true when it comes to forecasting financial markets.

If fact, I’d take his sentiment one step further and say that, not only is forecasting the future difficult, but it can also be hazardous to your financial well-being. Moreover, predictions become more difficult, and potentially more dangerous, the further you attempt to peer into the future.

I guarantee you can come up with some arcane indicator or data point to justify just about any forecast for the US economy, the stock market or a particular sector. And, if that’s too hard, you can always fall back on that age-old crutch of crafting a complex narrative involving politics or some ill-defined multi-year megatrend.

However, the more complex the argument or narrative, the less likely it’s going to stand the test of time.

The truth is that successful investing isn’t about making bold predictions about the future or the latest trends in Washington, D.C. and it’s certainly not about predicting economic conditions in 4- or 8-years’ time. Instead, it’s about understanding where we are in the economic and market cycle, following a handful of proven economic and market indicators with a history of giving useful signals and doggedly sticking to a risk management discipline.

In that spirit, this report represents my current take on the outlook for 2021 including a look at where I believe we are in the cycle, some of the key market and economic indicators I’ll be watching this year and, based on that analysis, a handful of sectors to buy and some to avoid right now.

Of course, absolutely none of this is set in stone; rather I consider it a rough guide to investing as we move through 2021 based on historical precedent and trends underway right now. To paraphrase economist John Maynard Keynes, if the facts change, I’ll change my mind.

A lot of easy money has been made in the markets so far this year. Although we are positive on 2021, a rigorous investment process remains as important as ever. Deceleration in global liquidity is, in our view, the main risk to equity markets.

China will be again one of the two most important pillars of global economic growth, and the single most important economy for metals. This should come at no surprise to observers of global economic developments, as the current rate of capital formation in China is, after all, unprecedented in human history.

Metals have performed strongly, overall, this year and so have done mining companies stocks. Such performance has attracted a lot of speculative buying in the sector, but this is to be expected. The pretext has been China’s strong economic rebound after the pandemic related demise in the early part of the year.

A one-month global stock market crash followed by an historic rally, devastating economic fallout from a pandemic and US elections—2020 has been a year with more than the usual ups and downs to say the least. And the uncertainty continues with jagged divergences in performance in the stock market and broad economy.

This month, our investment team of Elliott Gue, Roger Conrad, Yiannis Mostrous and our London Contributor, discussed (and occasionally debated) what we see as the key issues for DDI readers looking ahead into 2021. Here are the highlights. Enjoy!