A recent survey was done that highlighted the sector-specific weakness that is now upon us, has changed my thinking somewhat in regards to passive investing through an Exchange Traded Fund (ETF), and an active investing (i.e. picking and choosing individual stocks).
I do think that the rise of ETF have increased overall portfolio risk significantly, and is also thus reduced the diversification benefits of holding a widely diversified group of stocks.
This survey reported weakness in various consumer-facing retail businesses, reflected in an estimate that approximately 5% of Canadian businesses won't be able to make their May rent payment.
The reality is that brick-and-mortar retail businesses are likely to be under pressure for quite some time, affecting specific sectors negatively. Specifically, any Real Estate Investment Trusts (REITs) with exposure to retail or office real estate are sectors I'd avoid right now. These asset classes are likely to remain impaired for quite some time.
I would encourage investors who may be enticed by the high dividend yields and valuation multiples we haven't seen this low for a very long time, to take an appropriate pause here, as I believe there is more downside coming.
May’s numbers are only the start of a trend of income impairment for landlords; I expect to see similar negative performance in June and for the rest of the year. Investors ought to remember that their financial crisis which began in October 2008 really only bottomed out from a real estate perspective in 2010, approximately two years later.
There is very likely to be more pain on the horizon for those these specific sectors, so I advise patience right now.
Invest wisely, my friends.
