Stay the course: real assets are built for geopolitical shocks

Investors who have an allocation to real assets may have improved their chances of withstanding the current economic strain, says Vince Childers, senior vice-president and head of real assets multi-strategy with Cohen & Steers.

In the latest episode of the Soundbites podcast, Childers said real assets — like listed infrastructure, real estate, natural resource equities, and commodities futures — have a demonstrated history of providing resilience and diversification during times of conflicts.

“We hold them for a reason. One of those reasons are stagflationary type impulses or shocks, like what we appear to be experiencing right now,” he said. “Part of their role is to provide a ballast to our core stock and bond exposures.”

Even before the current volatility fades away, he’s already seeing the benefit of holding real assets.

“Our flagship portfolios right now [March 23], they’re up for the year, anywhere from, say, 8% to 10% against a global equity index that’s down 3% or so, and U.S. stocks down closer to 5%,” he said. “We would expect that the typical inflation hedging, positive inflation sensitivity of real assets works against a backdrop like this.”

It would be a mistake, he added, to fall prey to knee-jerk reactions in times of global turbulence.

“If there’s a big misconception around these types of geopolitical conflicts and their relationship to real assets, I think the most common one is to think that you can trade this type of thing tactically. You’re going to come out of hibernation, figure it all out, get in, get out, and somehow make profits trading around this,” he said.

Those are unrealistic expectations, he said. Rather, investors should stay disciplined and stick to their strategic principles.

“Real assets should be relative outperformers against a backdrop like this, and should hopefully relieve some of the pressure to feel like you need to respond to the short term and by definition, then, start to lose perspective on the bigger, longer-term picture,” he said. “Stay focused on the longer term.”

Global turbulence often settles down as quickly as it gears up, he said.

“The upside scenario would just be a quick resolution, and then we probably start to see a bounce back to the kind of themes that were in place when we came into the year,” he said.

The downside scenario, on the other hand, is scarier: protracted escalation of tension, the war drags on, the Strait [of Hormuz] stays closed, super spikes in the price of oil, a stagflationary impulse, increased supply-chain costs, policy responses — both fiscal and monetary — followed by labour-market strain and “that dreaded pairing” of inflation problems with recession risks in the background.

“Historically, geopolitical shocks are short lived and don’t cause this kind of permanent damage,” he said. “But there are stories and experiences in the past where what might have been a shorter-term shock turns into a new normal of extreme prices.”

In the current situation, the first impact on real assets tends to be on energy prices, and that has been playing out. A second-order impact is on transportation-linked infrastructure like airports, seaports, toll roads and railroads.

“And where are we? If I look right now, where we are for the month?” he said. “Well, it hasn’t been a great month for airports within infrastructure.”

Other real assets, like regulated and contracted infrastructure investments, are more resilient when risk assets across the board are getting hit, he said. Things like electric, gas, utilities, and midstream energy pipelines tend to be more defensive.

“Infrastructure, not surprisingly, turns out to be a relative outperformer in a world like that,” he said. “When it comes to inflation hedging and the inflation sensitivity of real assets, it’s pretty robust.”

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