After the stunning rally in January during which the benchmark rose 7.2%, February saw a steady reversal of the start-of-year euphoria. The benchmark corrected by -3.0% and managed only seven positive trading days in the month. However, much of this downward movement evaporates when you look at stock performance in local-currency terms. When viewed in euros, the benchmark fell just -1.2%. Sterling strengthened +1.8% during the month, bringing the year-to-date figure for sterling/euro to +4.8%. Currency markets appear to be pricing in a reduced risk of a ‘no deal’ or hard Brexit. As a reminder, the Trust’s currency exposure is managed in line with that of the benchmark by using forward contracts. This means that the manager’s stock-selection process is not driven by expectations of currency movements. The process also ensures consistency in the currency exposure, regardless of the underlying stock positioning. The net asset value (NAV) fell -2.3% over the month, delivering +76bps of relative outperformance. The share-price correction was even more modest, at -1.6%.

After the correction in late 2018, which totalled -11.2% for pan European real estate equities between September and December (as measured by the Trust’s benchmark FTSE EPRA/NAREIT Developed Europe net total return Index (in sterling), January saw a stunning reversal, with the index rising 7.2%. Every company in our universe made a positive return over the month. Viewed in euro terms, the return was even greater, at 10.3%. We would have to look back to the announcement of quantitative easing by the European Central Bank in 2015 to find a period of similar performance in the last decade. The recovery was driven by a mix of improving macroeconomic sentiment (US/Sino trade discussion, the increased likelihood of a soft Brexit) and the increased attractiveness of the sector, particularly relative to other assets. Another important factor was the renewed dovish commentary from central banks. Expectations of rate rises in Europe were pushed back even further, and the 10-year bund yield tightened from 0.24% to 0.15% as the German economy registered its second quarter of slowing growth. In essence, bad news (slower growth) appears to be (relatively) good news as far as income-sensitive assets such as real estate are concerned.

Global equity markets had a rollercoaster ride in December. Investors were buffeted by macroeconomic concerns coupled with weakening global growth data towards the Christmas break. This concoction culminated in dramatic price movements exacerbated by reduced trading volumes in the holiday period. Real estate equities were no exception, and while the benchmark closed down 3.8% for the month, we saw an intra-month correction of -5.3% between 12 and 27 December. However, the sector outperformed broader European equities, with the STOXX Europe 600 down 5.4%, bringing the 2018 performance down to -10.2%, its worst annual performance since the global financial crisis.

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The correction in global equity markets in October looked set to break with a significant rally in the first two weeks of November however this was followed by a bout of renewed weakness as investors again focused on the key issues of the slowdown in global growth, China/US trade war, Brexit and whether the Fed would maintain its hawkish stance. Pan European real estate equities performance was again bifurcated between UK stocks (-4.5% in GBP) and European names (+0.5% in EUR) with the gap opening wider towards the end of the month. The Trust’s NAV fell -1.21%, underperforming the benchmark which fell a modest -0.84%.

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