Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about real assets with Michelle Butler, senior vice-president, portfolio specialist with Cohen & Steers. We talked about long-term secular trends and macroeconomic factors, and we started by asking how real assets have performed so far this year.
Michelle Butler (MB): Real assets have performed quite well this year. Generally, real assets are up around 9% year to date, outperforming global equities, which are up about 7%. So they’re roughly outperforming global equities by 200 basis points. When we look at the different types of real assets that comprise this category, some of course are doing better than others. Natural resource equities are up about 12%. Those are the producing companies of underlying commodities across metals and mining, energy and agribusiness. Infrastructure is next in line. Infrastructure is up about 9% this year, a relatively defensive equity play. Global real estate is up about 7%. And finally, commodities as an asset class is up around 6%. And of course, I’d be remiss if I didn’t mention gold, which is up 26% year to date. Again, as a whole, real assets are up about 9%, which is good in this heightened volatility environment.
Current opportunities
MB: We find compelling opportunities within each of the real-asset classes. So, for example, if I took real estate. Within the U.S., we have a preference for assets with strong secular growth profiles and pricing power. In Europe, we see value opportunities in Belgium — specifically Belgium industrial and health care. Yet if we look at Switzerland, we’re underweight properties, where we see valuations that are fairly rich today. So we differentiate under the hood. That’s an example within real estate. Within infrastructure, we prefer securities with pricing power, due to inelastic demand. That can be found within the environmental services sector. So there are various components that we will over- and underweight. Comparing asset class to asset class, we have a preference for infrastructure and resource equities today, where valuations remain quite attractive. We also like infrastructure for its defensive characteristics in a slowing growth environment, where we are underweight asset classes like real estate and commodities. Real estate has absolutely attractive fundamentals under the hood, but we have a preference for infrastructure and resource equities today. And commodities, the underweight is primarily reflection of a negative view that we have on oil markets that we believe will continue to be increasingly oversupplied as the year progresses.
Risks on the horizon
MB: Our outlook for the remainder of the year remains constructive. We believe the macro backdrop is quite attractive. Specifically, we still remain in an elevated, inflationary market. That tends to be an environment where real assets perform quite well, certainly relative to traditional risk assets like stocks and bonds. We are in an environment where interest rates have begun to trend lower and will likely continue to do so in different parts of the world as we progress through the back half of this year. That would bode well for real estate and infrastructure. We believe we’re in an era of scarcity. That remains a key secular risk — an environment where inflation will remain elevated, where we have seen an increased risk of negative supply shocks, oftentimes those are weather related. We have seen commodity investment on the part of producers that has led to undersupply in many markets. Certainly geopolitical uncertainty, that is part of the norm today. And an emphasis on fiscal dominance. That’s an environment that tends to favour real assets.
Diversification enhancement
MB: There’s a significant amount of interest that we’ve seen in real assets, in particular over the last three to four years, since we entered this new market regime where inflation has been elevated, where we’ve seen interest rates elevated and where diversification has mattered more. In the prior disinflationary regime, you didn’t need to be very diversified because the correlations between stocks and bonds were very low. However, today they’re exceptionally elevated. So for those investors that have a heavy stock:bond allocated portfolio, I would say they may not be diversified enough. Maintaining inflation beta and staying diversified is key. And that has led to increased interest on the part of investors that have been allocating to real assets to ensure they have that diversification and those diversified return levers within a portfolio.
And finally, what’s the bottom line on real assets in the current moment?
MB: We believe that the case for real assets is particularly strong today, given the heightened market volatility and the need for diversification, expectations for inflation to remain sticky, and attractive real-asset valuations compared to equities. We believe a diversified, multi strategy, real-asset solution — a single offering to real assets — is an ideal way for investors to get exposure. It’s a way for investors to gain that inflation sensitivity, to ensure they’re diversified and achieve an attractive and risk-adjusted return profile over a full market cycle.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Michelle Butler of Cohen & Steers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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