After preparing the financial markets for a potential interest rate hike in the middle of this month, Federal Reserve’s head Janet Yellen, elected by Forbes the third most powerful woman, decided to be on hold until the economic outlook clears. This Monday’s surprise announcement ignited a new wave of celebrations among dividend and emerging markets investors.
Yellen’s announcement came following the news that employers added a mere 38 thousand jobs in May. The figure was so low that she remained cautious and preferred to wait for more data. Remember that a couple of weeks ago she said an increase would be appropriate. As a result, some financial outlets say that this announcement effectively postpone a potential hike to September, opening a window of opportunity for speculative capital chasing certain types of stocks.
Until yesterday I was 100% confident that it was not worth considering emerging markets investments, such as the one I bumped into, Tierra XP Latin America Real Estate ETF, a new real estate ETF focused on Latin America (click here). Although their real estate investment trusts and real estate operating companies, especially in Brazil, have been underestimated, currency trend has been in favor of U.S. dollars. Currency exchange fluctuations caused by higher interest rates would likely trump any gains in the local currency. The announcement might interrupt the trend for now and favors gains in the short term, but it should resume in the long term.
Dividend stocks, including REITs, should also benefit from the announcement. Rather than interest rates, dividend yields will rule for a little longer, especially when equity REIT yields are on average 4.1%, as opposed to a 10-year treasury bond rate under 2%. This reminds me of what William Koldus said in a recent article. Back in 2009, he couldn’t imagine the current scenario of low interest rates (click here). This is what he said:
“In 2009, it was hard for me to imagine a robust recovery in the financial markets that extended for seven years, while economic growth struggled. It was hard to imagine seven years of zero interest rates, which would entice investors to keep reaching for income. After going through this low interest rate period, today, it is hard for investors to imagine a future that looks different from the current environment, as I could not do in 2009.”
Well, it appears that we’ll have more of the same. With this degree of uncertainty about the future, the status quo seems more likely.
Source: Tierra XP Latin America Real Estate ETF (NYSEArca:LARE), Seeking Alpha, Bloomberg
Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.
Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.