The recession is here (maybe). Are you ready?
Actually, that’s the wrong question. Are you prepared to make opportunistic investments?
Investors should look for opportunities not in spite of flux and uncertainty, but because of them.
The word recession evokes many emotions, mostly negative, with fear and concern being front and center. Clearly, the financial hardship that occurs during a recession shouldn’t be minimized, but that doesn’t mean you shouldn’t be prudently optimistic.
The economy will cycle. Economies expand, peak, contract, trough – and repeat. Economic contraction is the ideal scenario for opportunistic investors – providing an entry point below what you believe the current or near-future value to be worth. Of course, there are factors like intrinsic value, reward vs. risk, deciding between opportunity sets and more that need to be considered, but all of that exists within the larger scope of your wealth strategy.
No two cycles are exactly the same. Today, our world is experiencing global unrest and conflict. Beyond continuing to recover from a global pandemic, countries are at war, supply chains continue to be weak, and high demand has led to inflation and subsequently higher interest rates. With this cocktail of economic difficulties, it’s critical to consider some important opportunistic investment ideas.
Two-year U.S. Treasury yields are over 4%. The last time we saw this rate was 1987. There are many attractive opportunities today to find yield. Factors that influence the yield include credit quality and maturity.
PUBLICLY TRADED REITS
Stocks trade up and down, and many times a disconnect exists between the price the stock is trading at and the underlying value of the asset. In the case of publicly traded REITs, we get excited if there is an argument that the real estate is worth more than the stock price.
Why? When interest rates rise (or when stock falls), it’s not uncommon for REIT stocks to drop as well. While we don’t always entirely know why, we know that when we dig a little deeper, it becomes clear not all REITs are created equal!
PRIVATE REAL ESTATE
At Lido, we have the good fortune of working and partnering with incredible real estate professionals, which helps us invest by thinking more about where the economy will be tomorrow vs. today. When it’s sunny, we look to buy umbrellas. When it’s raining, we look to buy swimsuits.
Rising interest rates affect home affordability – more people continue to rent. Yet investors have used aggressive amounts of leverage to purchase apartment buildings over the last several years. Borrowing costs were low if the loans were adjustable, but now many of those same investors are looking to unload. See the potential opportunity?
Private equity receives enough attention – let’s talk about private credit.
Credit takes many forms. In its simplest form, all kinds of midsized companies need to borrow money. They could own hotels, sports teams, medical practices, equipment for leasing, airplanes, hospitals, virtually anything.
There are firms that specialize in lending money to these companies. The lenders (private credit) analyze the company and the opportunity, assessing a multitude of factors (business visibility, collateral, etc.). Many of these loans are fairly short term (under three years) and can command an interest rate in the low double digits. It’s a speculative and technical area of investing, and you need to understand the risks before moving forward.
Regardless of the economic cycle, there’s always an opportunity to find growth and value. Always consider the risk, but when applicable, be opportunistic. For many asset classes, it has been a rainy day. Go buy swimsuits.