More Rate Increases Ahead; Takeaways for High Net Worth Investors
The Federal Reserve is sending clear signals of another interest rate increase. With rising confidence that the economy is poised for robust growth, Fed Vice Chair Stanley Fischer told CNBC that he sees the central bank raising rates two more times this year.
Yet the investment landscape is far from settled. In fact, the U.S. commercial real estate market is turning cautious. Prices rose 9 percent last year as transaction volume fell 11 percent, according to the Moody’s/RCA Commercial Property Price Indices.
Reforms in health care, banking, trade and tax policy all add to the uncertainty. Where does that leave high net worth investors interested in preserving and building their wealth?
Diane Swonk, the well-known macroeconomist and longtime adviser to policymakers of both political parties, spoke earlier this year at the Origin Investments annual shareholders investor event. Here are our takeaways for high net worth investors.
Will earnings grow? C-suite is bearish
President Donald Trump’s election set off a $2 trillion rally in equity markets. “He (Trump) gave an acceptance speech that focused on two things: unity and pro-growth policies,” Swonk said. “What the market bet on was that a unified Congress and a president willing to focus on pro-growth-only policies, instead of some of those more controversial policies, would give us what we needed.”
While equity markets seem strong and investors show confidence, corporations still are trying to gauge the potential impact of an interest rate increase, a strong dollar and policy shifts on taxes and trade. “They’re putting a lot of things on the shelf. Uncertainty creates hesitation, instead of determination, and that’s not what I want to see. You want the economy moving, not reacting to hesitation. I’m concerned about it.”
For high net worth investors, that’s a signal that the road to growth is pocked with land mines, as noted in my previous blog on Swonk’s economic outlook and on building wealth now. People always need a place to live, which makes apartments a smart defensive play. Chicago and Houston multi-family projects are recent additions to the Origin Fund III portfolio; past projects like Chicago’s Lux24 have paid off handsomely.
A diverse portfolio is the best defense.
It will be hard for high net worth investors to justify buying or holding such high-priced equities. “The problem is, the market seems to be ignoring a lot of reaction functions, like a strong dollar or higher interest rates, and how that might affect us,” Swonk says. “If you go by the tariffs that [Trump] suggests, you get a 2 percent increase in inflation overnight. Think about that.” Meanwhile, the quick $2 trillion post-election rise in market capitalization comes with a challenge: Can profits grow that much faster?
This doesn’t mean investors should abandon stocks and bonds — they’re still the foundation of any portfolio. But it does show the value of diversifying among many asset classes. Alternative investments lower the volatility of an uncertain market without sacrificing high investment returns. Private equity real estate adds an earnings stream insulated from unsettled equities markets.
Real estate valuations: Dig down to the fundamentals.
Swonk noted that the Federal Reserve governors — notably Boston Fed president Eric Rosengren — have been warning about the effect of an interest rate increase on commercial real estate valuations. The Fed’s latest report on monetary policy warned that capitalization rates — a measure of profitability — are “decreasing to historically low levels.” And it raised eyebrows with an opaque warning that small banks would be “vulnerable to a sizable commercial real estate price decline.”
While an interest rate increase can reshuffle the capital stack, it will have little effect on properties with a healthy income stream. So high net worth investors considering investments in commercial real estate will need to understand the local market — its occupancy rate, capital flows and employment profile — to find properties with the greatest potential.
Origin develops relationships with brokerage firms in eight thriving markets. Our “boots on the ground” bring us partners who value our ability to deliver timely private financing. As a result, when market conditions are unsettled we can make off-market deals at an advantageous price, and our operational expertise helps unlock their “trapped” value.
Investors need to replace hesitation with determination, and our approach has rewarded them in good and bad market conditions. While economic uncertainty is unlikely to end anytime soon, our investors should be able to plan with confidence.