Transcript: With stagflation forces afoot, real-asset allocation offers ballast
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 real-asset investing with Vince Childers, senior vice president and head of real-asset multi-strategy at Cohen & Steers. We talked about what makes real assets so attractive right now, and potential headwinds that could disrupt them. And we started by asking why he thinks we’re headed for a period of secular stagflation.
Vince Childers (VC): So, the first thing to recognize is that the market is pricing a rapid return to low and stable inflation. Basically, just saying, “Hey, this is some anomalous thing that will soon come to an end.” We think there are supply-side risks in the economy that really threaten those kinds of expectations. Namely, very tight labour markets and what looks like very sticky wage growth. We think there’s a prospect that additional supply-side risks could really be with us for a while. We also see underinvestment on the commodities side, and a lot of policy development in the direction of deglobalization, friend-shoring, reshoring. Those types of events can decrease growth and push inflation higher. And that’s this kind of regime of secular stagflation that we have been talking about.
What kind of real-asset investments make sense in this climate
VC: There are actually a lot of securities, industries and sectors that fit the bill. But if we need to boil them down to those that I think really are at the nexus of the real-assets opportunity, it is the core four. And that’s global real estate, exposure to commodity futures, investments in resource equities, and then finally listed infrastructure. If you kind of think of those four, you’ve got a pretty solid idea of what kind of things make sense in a broader, diversified real-assets allocation.
What makes real assets so attractive right now?
VC: If you put together the portfolio of the real assets with a certain kind of thinking, you can build portfolios that really do three important things for you, right? They can maintain return, but they can also bring a diversifying element. Basically, you can build real-asset portfolios that have lower equity beta and more diversification characteristics within the broader portfolio. And then, third, you’re getting this kind of return maintenance and diversification benefit in assets that tend to have a positive inflation beta. And so, the arguments extending from that would be if there’s any chance that we’re right about these stagflationary-type dynamics, well, the one thing we know from history is that that tends to be very rough on fixed income and very rough on global equities. But real-asset portfolios tend to hold up much better.
Potential headwinds for real assets
VC: There are a lot of things that matter. Timeframe, what is the return requirement for the investor, how much diversification do people think they need, how much inflation sensitivity may someone need or not need. All of those are going to be highly variable at the level of almost any investor — individual through to institutional. What I can say, though, in broad strokes is if there are risks to these assets, it’s going to come from further disinflationary or, let’s say, outright deflationary risks. If the inflation surprise goes negative, well, your excess is exposed to that and you’ll tend to underperform if you get big disinflationary dynamics.
And, finally, laying out the case for real-asset investing in the current environment
VC: An allocation to real assets is something that’s always good for the investor’s long-term financial health. The only real difference between the permanent advice and today’s advice revolves around how the risk environment for the macro economy has changed. If we really do think there are prospects for further and persistent negative supply-side shocks, then that tells us that we are going to be looking potentially at a very different decade ahead than the decade pre-pandemic. And these assets that I think are always good long-term investments, maybe there should be a little bit more urgency about making sure they’re not being neglected in the portfolio versus any particular moment in the past.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Vince Childers of Cohen & Steers. 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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