Page 17 - DIY Investor Magazine | Issue 36

The prospect of sustained inflation across a number of commodities, as well as headwinds to export demand, pose further challenges for the region.
Meanwhile, China’s struggles with Covid continue to weigh on sentiment. Nevertheless, this gloomy prognosis appears to have already been largely discounted.
Aggregate valuations for the region are now trading at or below long-term averages, suggesting that the bad news may already be in the price.
REAL ESTATE
Like private equity, real estate is another asset class that is highly suited to the closed-ended investment trust structure, because of the illiquidity of the underlying assets.
Property has many attractive investment characteristics. It has traditionally been seen as a good way of introducing more diversification to a portfolio, with low correlations against equities and bonds and less volatility than equities.
Furthermore, rents tend to rise in line with other prices over the long term, providing the potential for a partial hedge against inflation and, because it is a physical asset, there is more opportunity for skilled managers to add value through redevelopment and operational improvements.
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Dec 2022
DIY Investor Magazine ·
However, despite these strengths, real estate is not immune to economic headwinds. Higher interest rates have a direct impact on the ability of debt-backed investors to buy real estate and they may deter institutions that allocate capital between real estate and bonds.
Although real estate yields are not mechanically tied to interest rates, they are likely to increase in the short term, depressing capital values.
In addition, weaker growth is likely to reduce occupier demand, particularly in sectors that are already under pressure from structural changes such as e-commerce and home working.
By contrast, a number of other real estate types are benefitting from structural change including warehouses, data-centres, student halls and laboratories.
These are clearly challenging times economically, and the near-term outlook is perhaps as inscrutable as it ever has been. Looking beyond short-term uncertainty, it is worth reiterating the long-term perspective and discipline that is normally required for successful investment outcomes.
The average UK investment trust is trading at a 15% discount to its net asset value (source: Bloomberg as at 30 September 2022).
This is the widest discount in at least a decade and means investors can currently buy a pounds worth of assets for just 85p. Irrespective of the current uncertainty, therefore, attractive long-term opportunities can be found, and investment trusts remain a highly attractive structure.
More information on investment trusts here >
SUMMARY