Backdrop of economic uncertainty favours real assets

Real assets offer hedging opportunities in volatile markets, but tend to be missing from many people’s portfolios, says Vince Childers, senior vice-president and head of real assets multi-strategy at Cohen & Steers Capital Management.

He said real estate, listed infrastructure, resources equities and commodities are especially useful in the current economic climate, where equities and fixed-income investments are equally vulnerable to potential stagflation.

“There’s a hole in most people’s asset allocations that real assets can successfully fill,” he said.

“When you get adverse inflation shocks, especially when they are supply-side driven, they have a stagflationary nature to them where inflation goes up but growth surprises to the downside,” he said. “That tends to be a bad environment for the bulk of most people’s portfolios. But very often, real assets benefit.”

He said real assets function as a kind of investment insurance that pays off in uncertain times.

“It pays to be humble in the degree to which you think you can forecast [economic] outcomes,” he said. “I think people should think about real assets as a long-term strategic holding. Get it in your portfolio, realize that it does special things in terms of diversification [and can bring] positive inflation sensitivity into the portfolio … with a pretty good risk-return profile, actually, over the long haul.”

For Childers, real-asset investing is all about strategic allocation, focused on valuation indications.

“As of right now, the most attractive valuation signals we’re getting are on the resource equities and infrastructure sides,” he said. “Valuations look a little bit more in neutral territory for us on real estate and commodities.”

Childers said all real assets look very cheap relative to a global equity index.

And the timing is right, he said, given his bearish position on global equities.

“Markets overall look a little frothy to us. If, in a six-month horizon, we get a big market correction … that more likely than not puts downward pressure on anything with a risk premium associated with it,” he said. “I think it’s probably the kind of environment where real assets could outperform.”

Childers is skeptical of the prevailing soft-landing narrative.

“There are a number of pathways that we think create a risk case for rekindling inflation,” he said. “We shake out on the view that current rate and inflation expectations just look overly optimistic to us and represent kind of a risk case for the markets more broadly that have priced in such a dovish view.”

Childers said expecting inflation to return to normal is overly optimistic. Where some investors have already priced in anticipated rate cuts by developed economy central banks, he believes that could be premature.

He said there are signs we could inhabit a world where inflation rates remain higher than desired, and the 2% target could be difficult to achieve. Such a scenario, he added, would be favourable to the major real-asset categories.

**

This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.