A Q&A with investors

Listed Assets: Seeing Value Emerge

The market turmoil of 2022 sent many investors heading to the exits. And that has created some opportunities based on valuations. We asked two of our leading investors to discuss what they’re seeing right now, what opportunities are available and where the dangers may lurk.

Key takeaways

01

Volatility discounts

Volatility and uncertainty in the public markets have created significant discounts in some liquid assets.

02

Pulling to par

In high-yield debt, a mix of lower default likelihood and high discounts to par suggest a buying opportunity.

03

Valuation opportunities

In real estate and infrastructure, securities are trading below both net asset values and gross asset values.

Introduction

The market turmoil of 2022 sent many investors heading to the exits. And that has created some opportunities based on valuations. 

Listed real estate and infrastructure securities, including REITS, have been buffeted by negative equity market sentiments, and are trading below their net asset values and gross asset values – in fact, real estate is trading well below its long-term historical levels. Over the long term, these securities have offered more diversified exposure and similar returns to their physical underlying assets.

And in high-yield debt, bonds are trading at discounts to par that appear similar in some ways to price moves seen during the crises of 2012 and 2020. Yet in the intervening years, many of the market’s fundamentals have improved to where the default risk appears to be lower than before either of those periods.

We asked two of our leading investors to discuss what they’re seeing right now, what opportunities are available and where the dangers may lurk.

What are you seeing today in your respective markets?

James Wilkinson: With the stress we've seen over the last 12 months and the risk aversion within the equity markets, some real estate operating companies and REITs are trading at over 20% discounts to gross asset values, depending on where you are in the world.

James Turner: High-yield bonds customarily offer an attractive return story from the coupon alone, however, they are now at values that are well below par, and so are offering a significant capital appreciation opportunity as well.

Interest coverage

The figures shown relate to past performance.  Past performance is not a reliable indicator of current or future results.
Indices are unmanaged; direct investment is not possible.  Index returns do not reflect fees and expenses but do reflect the reinvestment of dividends, capital gains, and interest.

Do you think that values could fall even further?

James Turner: While high-yield bonds are likely to continue to be volatile, the significant discount we’re seeing will eventually evaporate as the pull-to-par occurs over the next two or three years for most of these securities.

The question is, are you able to pick the bonds that avoid defaults? Because defaults can eradicate any benefits a portfolio sees from evaporating discounts.

That's where credit selection comes in, and allocating to managers with extensive bottom-up research capabilities.

On the whole, though, the market is currently pricing in a level of defaults that we think is unrealistic, resulting in excess returns being on offer.

James Wilkinson: In the long term, these investments are driven by the fundamentals of the physical asset classes, but we see short term swings caused by general equity noise. Our fundamental valuations have already taken into account a roughly 250bps increase in real yields and debt costs this year.

That doesn't mean that tactically it's not going to be a tricky three-to-nine months. Both NAVs and GAVs could fall further. But these discounts to NAV are rare events and within real estate there have only been six such cases where share prices have traded at a greater than 30% discount in the past 30 years, according to UBS.

Are you worried that the discounts reflect true values?

James Wilkinson: We're not at the same discount levels as we saw during the global financial crisis, but we're not far off in certain pockets of the market. And yet there are some fundamental differences in favor of listed markets.

For example, the companies themselves are not under as much balance-sheet stress, and loan-to-value ratios are significantly lower.

James Turner: During the financial crisis, the high-yield default spike in Europe and the U.S. went up into the low teens – even now the European high-yield market is pricing in defaults in excess of this.

As a result of abundant capital available, quantitative easing and low interest rates, companies were able to push out maturities at attractive fixed interest rates – there is no impending maturity wall in the next 12-18 months.  Also, the quality of the market overall has improved since the financial crisis.

Another fundamental support is that more of the high-yield market is now senior secured. So, even in the case of a default, you'd expect recovery rates to be higher.

Default rates

The figures shown relate to past performance.  Past performance is not a reliable indicator of current or future results.
Indices are unmanaged; direct investment is not possible.  Index returns do not reflect fees and expenses but do reflect the reinvestment of dividends, capital gains, and interest.

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Market insights contributor

James Turner
Head of European Leveraged Finance, BlackRock Alternatives
James Wilkinson
Head of Global Infrastructure and Real Estate Securities, BlackRock Alternatives