With stagflation forces afoot, real-asset allocation offers ballast

The anti-inflationary properties of real assets make them a natural investment choice for the current economic moment, says Vince Childers, senior vice-president and head of Real Assets Multi-Strategy with Cohen & Steers in New York.

Childers said real assets like global real estate, commodity futures, resource equities and listed infrastructure have anti-inflationary properties that suit economies marked by stagflation.

Not only that, he said, real assets offer long-term, full-cycle returns and add a diversifying element to traditional portfolios.

“Investing in some real assets that are loaded on the positive side of the inflation shock can help as a kind of ballast for the overall allocation,” he said.

Childers believes global markets are currently pricing in a rapid return to low and stable inflation — a position he cannot agree with. “We think there are supply-side risks in the economy that really threaten those kinds of expectations,” he said.

Among the key indicators he points to are tight labour markets, sticky wage growth, an underinvestment in commodity markets, and the accelerating trend of deglobalization.

“When we start to put all these pieces together, we think there’s a whole series of potentials for negative supply shocks … that can decrease growth and push inflation higher,” he said. “And that’s this regime of secular stagflation that we have been talking about.”

He warns that once inflation embeds itself in an economy, it can be very stubborn.

“It’s very easy for people to get head-faked affectively, and think they’ve got the problem solved, but it isn’t solved,” he said.

According to Childers, 2021 and 2022 offered “absolute proof of concept” for how real assets work.

“We had this type of stagflationary shock,” he said, “and real-asset portfolios did, in fact, open up a very large performance gap.”

In the lead-up to the pandemic, however, the U.S. saw 11 straight calendar years where realized inflation was below expectations. On paper, it made sense to think real assets would have underperformed.

“Lo and behold, that’s what happened,” he said.

Now, with stagflationary dynamics and potential supply shocks, real assets should do well. He said investors who believe current inflationary trends are temporary should have a base case that real assets won’t perform well.

“We can quibble over whether or not I think that’s a good base case. Obviously, I don’t,” he said. “I think that real things have changed in the world that make it unlikely that we get this return to the old normal.”

Childers regards real assets with an eye to the long game, and with an appreciation of what they can do as “a kind of utility player” in a broader asset allocation.

“I think that real assets and an allocation to real assets is something that is always good for the investor’s long-term financial health,” he said. “There should be a little bit more urgency about making sure they’re not being neglected in the portfolio.”

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