The investing environment changed rapidly over the last year, requiring asset allocators and investors to recalibrate in a world where money is no longer free. Following the losses faced by fixed income investors over 2022 due to rising interest rates, the asset class now generates yields that have not been seen for many years. This shift has driven flows across asset classes causing volatility across most risk assets. Traditionally defensive listed real assets sectors, such as infrastructure and property, saw increasing levels of volatility as interest rates adjusted. These sectors had attracted allocations over several years with investors hunting for yield and benefiting from the portfolio rotation and risk seeking efforts of the preceding QE era.
The key question now for investors, therefore, is what role should real assets play within income-seeking portfolios given that certain parts of the fixed income market now offer a real yield? The first consideration is that, in most cases, fixed income investors still need to creep down the credit curve to achieve real yields, and will not see their interest income grow. As central banks have raised their respective policy rates, these higher interest rates are starting to cause cracks in certain parts of the economy ultimately increasing the risk of defaults. Second, the increased cost of money and recent bank failures/restructurings also call to question how freely credit will be made available going forward. When considering investment implications, these factors continue to warrant a focus on quality and companies that benefit from low cyclicality in earnings streams. Although inflation seems to be cooling, central banks still have the challenging task of managing inflation towards their target levels. If policy makers continue to raise interest rates, or even maintain them at elevated levels for an extended period, those higher yields on offer today might lure investors into capital losses when hunting for yield down the credit curve.
In the search for quality and yield, investors should continue to consider real assets within their multi asset portfolios. Real assets can offer exposures to structurally growing sectors with growing income streams and inflation linkage supporting asset values, driving the potential for real returns. The sector benefits from contractual earnings streams backed by high quality counterparties such as governments, utilities and investment grade corporates. Areas such as renewable energy infrastructure, social infrastructure and digital infrastructure remain key areas of growth going forward and offer investment opportunities for decades to come. The growing trends of re-and-near-shoring, data storage and ageing demographics also present significant opportunities for real estate investors across logistics, data centre and healthcare sectors. Tenants in these cases tend to be the better capitalized structural winners in economies or even supported by governments.
Today, the listed real assets sector offers investors an opportunity to drive attractive total returns. Targeting the right sectors can generate reliable and growing dividend streams as well as capital appreciation potential through structural growth drivers, or interest rate sensitivity if the rate cycle were to turn. Valuations in listed real asset markets are now historically attractive and this is recognised by many of the biggest private investment firms globally who have begun to execute on take-private opportunities. In an economic environment where the profitability and growth outlook remains uncertain, income streams from high quality counterparties with contractual escalators provide an attractive risk adjusted alternative to taking traditional equity or lower quality credit risk. Furthermore, a focus on sustainability considerations can protect and enhance long term returns by reducing the risks of obsolescence or elevated capex requirements to meet the growing list of environmental regulations.
This blog post is for information purposes only and without limitation, does not constitute an offer, an invitation to offer or a recommendation to engage in any investment activity. Readers should not construe the content as investment advice and no reliance may be placed upon it. The value of investments and income from them may go down as well as up, and past performance is not a reliable indicator of future performance and may not be repeated. Capital is at risk.
Assumptions, estimates and opinions contained in this blog post constitutes our judgment as of the date of the document and are subject to change without notice. Any forward-looking statements or projections are based on a number or assumptions as to market conditions and there can be no guarantee that they will be achieved.
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