Q1 2023 Catella APAM Investment Market Commentary

“Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit at home and think about it. Go out and get busy.” Dale Carnegie

A lack of confidence has gripped the markets as investors adjust to the new world of tighter monetary conditions. Just as over confidence pushed investors to believe in the lofty valuations we saw running up to the first half of 2022, the pendulum has now swung the other way. Once again valuations are being detached from fundamentals, but this time it presents opportunities for those confident enough to identify value.

Hesitancy has been reflected in deal activity which remains below average, but a number of transactions has demonstrated the need for investors to rebalance their portfolios and opportunistic buyers to capitalise on the opportunity.

The collapse of financial institutions and perceived over exposure to the commercial real estate sector has led to calamitous forecasts of the sector’s demise. And while the market at large faces ever stickier inflation, potential interest rate false peaks and continued geopolitical risks, we see this as a correction rather than a collapse and should exemplify the benefits of true active management. This quarter we revisit real estate valuations and consider the impact of leverage in the system. We further stress the view that the current risk premium applied to real estate does not compensate investors adequately and parallels to fixed income products are far less appropriate than they once were.

There is no doubt that the rest of the year will prove eventful as the equity and bond markets seem to be predicting contrasting outcomes. Regardless of direction, we foresee opportunity for investors willing to display confidence and price the risks appropriately.

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