A Chartwell Seniors Housing REIT in Toronto. Investment in domestic real estate has exploded in recent years and the market capitalization of the iShares S&P/TSX Capped REIT ETF has increased tenfold since 2006.Fred Lum/The Globe and Mail
What sector should investors buy on the TSX based on the actions of corporate insiders right now?
Despite being far from the height of their popularity, it's real estate investment trusts, according to Ted Dixon, CEO of INK Research.
"As we head into Christmas, insider sentiment is signalling that real estate investment trusts offer the best opportunity for short-term gains in the Canadian market," Mr. Dixon said in a research note.
A couple other sectors - basic materials and telecom - have insider buying levels as high or even higher. But for the short-term, Mr. Dixon looks at both the level of insider buying and the duration of elevated insider buying interest, and REITs are scoring big when looking at both criteria.
The REIT insider sentiment indicator at INK Research, which tracks the buying and selling of securities by officers and directors within their own businesses, stands at 333 per cent. That means there are more than three REITs with key buying for every one with selling.
It's been higher – much higher – at an eye-popping 1,600 per cent back in August. That means there were 16 REITs with key buying for every one with selling.
But insiders tend to be early, and their peak buying tends to take place around market lows. Indeed, the iShares S&P TSX Capped REIT index fund hit two-year lows last August as well.
Those lows were re-tested last week. But REITs enjoyed a bounce on Friday when the U.S. jobs report came in stronger than expected. That may have come as a bit of surprise, given that strong employment reports of late sparked a spike in Treasury yields and a simultaneous downturn in REIT prices. The thinking among market players is that stronger employment will bring an end to the Federal Reserve's bond-buying program, known as quantitative easing.
But on Friday, the 10-year Treasury ended the day down slightly at 2.86 per cent.
Mr. Dixon has a theory why: very benign inflation, which would suggest low interest rates are here for some time.
"The failure of bond yields to jump may well be explained by U.S. inflation data which was also released on Friday but did not receive a lot of attention in the media," said Mr. Dixon. "The Personal Consumption Expenditure (PCE) Price Index advanced a meagre 0.7 per cent, which is in euro zone territory and is well below the Fed's 2 per cent target. With inflation in a downward trance, it is not a big surprise to us that U.S. bond yields are having a hard time moving too much higher."
"If long-term rates stay well behaved, REITS could benefit. Insiders seem to agree."
Darcy Keith