Not unlike last year, we approach 2009 with a lot of caution but we still recommend REITs as a defensive investment. There are three reasons we view REITs as attractive in the current environment: dividends, valuations and dependence on debt financing.
We are sure the first two are intuitively easier to grasp than the last one, but our rationale is really quite simple. We think REITs sold off in two stages: the first sell-off, which began in 2007, was almost entirely driven by the early-stage paralysis in the debt markets; the second stage, which occurred in a brief seven-week period starting in early October, was a function of mounting domestic and international economic fears combined with the confirmation of a world financial crisis.
As for how this plays out in the 2009-2010 period, we think it unwinds in reverse with an easing in the credit markets first, followed by the eventual recognition of improving economic data points. Consequently, a debt dependent sector, such as REITs, stand to log significant gains as soon as the credit markets improve.
Keefe, Bruyette & Woods
In this environment, play defense; focus on companies with fewer capital commitments and strong balance sheets. In our view, the seeds of an ultimate recovery lie in a clearer view to accelerating, rather than decelerating, earnings prospects. Our economic forecast calls for a deeper recession through early 2009, followed by a slow recovery later in the year. Once Street expectations move lower, a recovery could be a potential catalyst for upside.