Entering the stock market in January is like stepping into a cauldron of surprises, and as the curtain rises, a peculiar ritual begins. It’s the time when downgraded debt takes on an inexplicable charm, consistently outperforming in the first month of the year. This riddle, known as the ‘January effect’, has manifested in 18 out of the past 21 years and 2024 stays faithful to history. The ICE US Fallen Angel High Yield 10% Constrained Index outperformed the ICE BofA US High Yield Index by 56 basis points. What strikes an unusual chord this year is the composition of the fallen angels index, dominated by real estate, retail, and telecom.
JPMorgan raises the red flag, forewarning of potential further downgrades in the months to come. A noteworthy $1.3 trillion collectively defines the high-yield market’s worth. Among this staggering figure, $1.05 trillion is rated BBB- by at least one rating agency, while $111 billion is under the vigilant gaze of at least one agency with negative implications. The bank identifies sector-specific concerns in the realm of real estate, hinting at imminent downgrades. It also acknowledges a milder peril of a sluggish economy, which might prompt additional downgrades.
The past three months have woven a tale where 5 REITs have treaded the path to join the fallen angels index, asserting their authority with a 12% dominance. Their adversities are multifaceted, encompassing leverage, dwindling renewal rates, a bleak revival in office vacancies, and rising insurance costs. The sector is poised to remain ensnared in pressures, particularly within commercial real estate, where a whopping $2.2 trillion in loans is set to reach maturity between now and 2027.
Finsum: REITs hoist the flag at the apex of the fallen angels’ index, a testament to the tempests ravaging the commercial property landscape and the cyclical strains inflicted by towering interest rates.
- real estate
- high yield
- macro
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