The Federal Reserve interest rate hike of the new tightening cycle finally came in December, but global economic growth weakness may now mean that future rate hikes are already on hold. While most investors are now focused on the implications for bank stocks,Blackstone Mortgage Trust (BXMT) REIT may be the best under-the-radar way to play a lower-than-expected interest rate environment.
The Obvious Choice Isn’t BXMT REIT
BXMT isn’t the obvious interest rates play, but that doesn’t mean it’s not the play. Let’s get the obvious play out of the way: banks. Yes, banks are certainly hurt by lower interest rates. Banks rely on net interest margins to make profits, and margins are limited in a low-rate environment.
Unfortunately, selling bank stocks is such a good idea that the entire market has already beaten you to it at this point. So far in 2016, the Financial SPDR (XLF) is down 10.4%, and rate-sensitive bank stocks like Bank of America (BAC), State Street(STT) and Bank of New York Mellon (BK) are all down 13% or more. These stocks could all have more downside, but it appears to be limited at such cheap valuations.
The same story can be said for life insurance stocks as well. The high-quality bonds that represent a large amount of life insurers’ income now seemed destined to remain at historically low yields for the time being. Because life insurers can collect premiums for decades before having to pay out a claim, they rely more heavily on this type of fixed income than other types of insurers. Unfortunately, life insurance stocks like Lincoln National (LNC), Prudential Financial (PRU) and MetLife (MET) are also already down more than 16% each this year and now trade at forward P/E ratios below 7.
Stick with me. I’m getting to REITs, and BXMT specifically.
An Extreme Example
If banks and life insurers are out, where else can investors look…
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