Macro factors lining up nicely for investment in real assets

An expected resilient growth environment over the next year should be great for real assets, says Vince Childers, senior vice-president and head of Real Assets Multi-Strategy at Cohen & Steers.

Speaking on the Soundbites podcast this week, Childers said the timing looks good for investments in global real estate, commodity futures, natural resource equities and listed infrastructure — the “core four” of real assets.

His optimism stems from a confluence of macro factors: a balanced labour market, persistent inflation above the Fed’s target, an environment of interest rate cuts, leading to declines in real interest rates or real yields declining.

Childers argues that despite a slowing in non-farm payrolls growth, the labour supply in the U.S. is also contracting due to demographic factors and immigration policy. The result is a job-vacancies-to-unemployment ratio that remains around one.

“That, to us, is a signal of a pretty balanced labour market,” he said. “That kind of stability, we think, is what can support consumer spending and support wage growth, and in turn, sustain some of the type of price inflationary pressures that tend to benefit real assets.”

As for inflation, he said there are no indications yet that inflation is expected to revert back to the 2% target that central banks would like to see. He expects further rate cuts from central banks and a resultant decline in real yields.

“When we put all those pieces together, that’s typically been a pretty good backdrop for real assets,” he said.

Within real assets, he favours resource equities, which look statistically cheap, but have an improving growth profile given their positive inflation sensitivity. Similarly, listed infrastructure has attractive valuations and defensive properties.

“Those are our two biggest overweights in the portfolio,” he said, adding that the real danger for investors is trying to time the market.

“There’s always the risk of investors missing out if they’re waiting for perfect clarity on an entry point,” he said.

Childers said real assets deserve a permanent place in strategic asset allocations, even as a “utility player” to sit alongside core stock and bond exposures. But they make even more sense in an environment of extreme concentration, where markets are dominated by a handful of U.S. mega-cap names.

“Our view is that where we stand right now diversification is particularly valuable,” he said. “If we do see an environment of secularly declining real yields and inflation expectations rising in tow, that could be a nice kicker for people getting involved in [real assets].”

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