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 the outlook for real assets with Vince Childers, senior vice president and portfolio manager with Cohen & Steers Capital Management. We talked about how changing interest rates should impact the market. And we started by looking at how 2023 played out for real assets.

Vince Childers (VC): The way we finished up in the year was that global real estate actually turned out to be the strongest of the major real-asset classes for us, led by the North American REITs. Second best was infrastructure in our universe, followed by the resource equities — so, you know, energy companies, metals, mining, agri-business and so forth. And then, actually, really the only disappointing asset class for real assets turned out to be commodity futures, mostly due to energy commodities really getting hurt. But on the whole, the blend of real assets ended up in the positive column for the year.

The ‘new normal’ rate of inflation

VC: We could probably be best characterized as being skeptical of the soft-landing narrative that has become so pervasive. You know, a big part of that is predicated on this sort of ‘immaculate disinflation’ thesis — the idea that inflation will snap back to some old normal. That will create room for central banks to slash rates across the developed world. A big part for us, if we look at what’s priced, we’re still looking at upwards of five cuts for 2024, starting in March. I think we have to be in a position of handicapping that outlook and asking ourselves how much do we buy into it? The rub for us, in terms of having that as a base case, is simply that we think that the labour markets remain really tight, and that that’s going to be a headwind to this ‘immaculate disinflation’ narrative, that should make inflation a bit stickier. We think that it’s more likely that that should be the base case. And so that points, in our eyes, to not as many rate cuts, and central banks not being as free to just start slashing rates. And so, a higher kind of rate environment, we think, is probably more likely than not.

Opportunities for real-asset investing

VC: A big part of our process when we are allocating within and among the real assets is focused around valuation indications. The biggest factor for us is going to be which of the core real assets — global real estate, global listed infrastructure, resource equities and commodities — their level of cheapness. How attractive do we think these assets are on a valuation basis? As of right now, the most attractive valuation signals we’re getting are on the resource equities and infrastructure sides. And I would say valuations look a little bit more in neutral territory on real estate and commodities. I would say all of the real assets — if we want to think about how they look relative to, say, a global equity index in terms of attractiveness — all look very cheap. Valuation would point us to being overweight in our portfolio on the resource equities and infrastructure side and funding that overweight from real estate and commodity underweights respectively. That would be just the valuation story.

Risks on the horizon

VC: Markets overall look a little frothy to us, and in a, say, six-month horizon, if we get a big market correction, that more likely than not puts downward pressure on anything with a risk premium associated with it. If we’re going to take this view that things look maybe a little overheated and we’re going to have to digest a less-rosy scenario from an interest rate and inflation perspective, I think it’s probably the kind of environment where real assets could outperform against that background, but we still wouldn’t want to be leaning into just taking a whole lot of blind risk exposure, ultimately.

And finally, how he would summarize the case for real-asset investing in 2024

VC: So, the real headline for me is it pays to be humble in the degree to which you think you can forecast these type of outcomes. We’re going to make an argument for real assets that’s really based on the strategic allocation story. Most investors, when you really break down their asset allocations, have an equity exposure and a duration exposure through their fixed-income investments. We know that when you get adverse inflation shocks, especially when they are supply-side driven, they have that kind of stagflationary nature to them, where inflation goes up but growth kind of surprises to the downside, that tends to be a bad environment for the bulk of most people’s portfolios. But very often, real assets benefit against that type of backdrop. And that’s really the argument we make. It’s that there’s this sort of hole or a blind spot in most people’s asset allocations that real assets can successfully fill.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Vince Childers of Cohen & Steers Capital Management. 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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