One chief investment officer says the Bank of Canada’s shift from interest rate hikes to cuts continues to be a driving factor in the real estate sector.
Dennis Mitchell, CEO and CIO at Starlight Capital, joined BNN Bloomberg on Tuesday to share his outlook for real estate investment trusts (REITs) amid lower interest rates.
“The forecast this year is to cut another four times this year and another four times the year after,” Mitchell said. “And there’s potential for more cuts this year. So when we look at our fund, since the Bank of Canada started the rate cut cycle in May, the fund has outperformed the benchmarks significantly.”
According to Mitchell, Starlight Capital’s real estate fund is up “just under nine per cent since the start of June.”
“If you look at Canadian equities, U.S. equities or global equities, they are flat to slightly down over that same time period.”
Mitchell attributes this discrepancy to changes in sector leadership.
“Sector leadership is rotating away from the Magnificent Seven, if you will, those big seven tech stocks, towards things that are more interest rate sensitive, like utilities, and like REITs. Our fund is benefitting disproportionately from that.”
Overall, Mitchell says the best-performing stocks are “always going to be driven by the fundamentals over the long term.”
“In the short term, you might have people crowding into things that have been disproportionately beat up, regardless of their balance sheet or their payout ratio. You might get a short term pop out of that and be able to brag to your neighbour over the back fence as you’re grilling on your BBQ,” he said.
“But really, if you’re looking to generate long term returns and generate consistent compounding, it’s always going to be the names with the best fundamental outlook.”
Mitchell added that the ability to add value through repositioning assets or adding in a different tenant mix can also create reliable growth.
“That’s what’s going to add compounding over the long term,” he said.
To watch Mitchell’s full interview with BNN Bloomberg, click the video above.