REIT Investment Trends: A Tale of Two Valuations: REITs Sell Expensive Stocks and Buy Cheaper Bonds

NEW DELHI: As the curtain pulls back on two years of extraordinary monetary largesse displayed by the Federal Reserve, India’s stock market is feeling the pinch as the prospect of higher interest rates in the United States has pushed foreign investors to rush to the biggest economy in the world.

The Indian sovereign debt market, however, tells a different story.

Even as soaring US bond yields sparked a five-day selling spree in benchmark equity indices and wiped out more than Rs. influx of foreign investors. .

Data from the National Securities Depositories Ltd and the Clearing Corporation of India show that in the stock market, foreign institutional investors have extended the selling spree they embarked on in the last three months of 2021 until the current month, with net sales of Rs 8,791 crore from December 31 to January 21. In fact, the data suggests that REITs sold around Rs 4,594 crore of domestic stocks on Friday itself.

Given that US inflation is currently at roughly four-decade highs, it’s no surprise that investors are concerned that the Fed may opt for a faster-than-expected pace of normalization.

The yield on US 10-year bonds climbed 33 basis points month on month, hitting a two-year high of 1.89% on Wednesday. The two-year U.S. Treasury note, which is extremely sensitive to interest rate expectations, broke above the 1% mark earlier this week, marking the first time that particular level has been breached since 2020.

The U.S. Federal Open Market Committee, which in December reported about 3 rate hikes worth 25 basis points each in 2022, will detail its next monetary policy statement on January 26. The latest price action in the US bond market reflects market expectations of the Fed raising benchmark interest rates by 50 basis points in March.

Fierce selling pressure exerted by REITs on Indian equities from October to December 2021 – amounting to a net figure of Rs 38,521 crores – may have been more than offset by firm demand from domestic investors, but until ‘Now in 2022, local actors do not seem to be showing the same degree of resilience.

With the Reserve Bank of India holding a formidable arsenal of foreign exchange reserves, it is very unlikely that Indian financial markets will face a repeat of the infamous tantrums of 2013, but there could be even more difficulties in the short term. term for the stock market, especially given expensive valuations, analysts said.

In 2021, the BSE Sensex and NSE Nifty gained 22% and 24% respectively, as the economy began to recover from a record contraction the previous year.

“If interest rates start to rise globally, there could be outflows of REIT funds and falling valuation multiples across the world. It’s already kind of discounted, it’s not not fully discounted, it’s discounted, let’s put it that way. We will continue to see such things happen again and again,” said Deepak Jasani, head of retail research at HDFC Securities.

“There is no doubt that we are in a better position than the taper tantrums of 2013, but at the same time we have also seen a very strong rise in equity valuations. In 2013, this was not the case. This is why, despite the fact that we are in a better situation, we will still face problems when the reduction begins to occur. We cannot wish for this possibility,” he said.

RISE IN BOND YIELDS ATTRACTS REITs
According to official data, foreign portfolio investors have been net buyers of Indian sovereign debt so far this month, despite the multi-year rise in US Treasury yields.

CCIL data on state of debt utilization showed that REITs’ net investment in Indian government bonds increased by Rs 527 crore below the general limit and Rs 2,956 crore under the general limit. of the fully accessible route.

Treasury officials said while lofty valuations were a key factor pushing REITs out of Indian equities, a recent rise in government bond yields had drawn foreign investors into the debt market. Bond yields and prices move in opposite directions.

The yield on benchmark 10-year government paper has tightened 17 basis points so far in the month, well outpacing the psychologically significant market 6.50%. The yield on domestic 10-year bonds last stood at 6.62%.

High domestic inflation, hardening crude oil prices and the threat of higher US interest rates all contributed to the bond sell-off.

According to dealers, the increase in REIT investments so far in the month was largely driven by longer-term players rather than commercial investors who typically take bets on short-term views.

“It was mostly real money investor interest after the 10-year bond yield broke through the 6.50% level. It’s not really REIT trading activity; rather it was real money REITs that showed some interest in bonds as new investment allocations brought inflows and yield levels were higher,” said Naveen Singh, Chief Trading Officer and VP. Executive Chairman of ICICI Securities.