Asset Class Roundup | Real Assets

Real Assets May Still Outperform, but Be Cautious

December 6, 2022 | By: Stephen Bonnyman

Real Assets May Still Outperform, but Be Cautious

Steadying rates and peaking inflation could generate a positive tailwind for much of the Real Assets complex.

Notwithstanding the outperformance of Real Assets versus broader equities in 2022, the outlook for the group continues to appear positive into 2023.

Granted, the market continues to struggle to define a clear outlook for next year. But a consensus appears to be forming that a peak in inflation is within sight, and with it the potential for a cap in rate hikes (and maybe even rate cuts later in the year) and a rebalancing of the global economy. Steadying rates, continued inflation (even after it moderates), a peak in the strong U.S. dollar and the first signals of a China re-opening could generate a positive tailwind for much of the Real Assets complex.

Aside from the specific fundamentals of each industry/commodity, many of the sectors in Real Assets are benefiting from underinvestment in new capacity over the past cycle, leaving inventories low and supply constrained and inelastic to demand.

While the exceptional outperformance of energy will be challenging to repeat in 2023, the sector remains well positioned to deliver positive returns next year. Supply remains largely inelastic, with risk skewed to shortfalls rather than excesses, and demand is not entirely elastic to global GDP (for instance, in the event of a shallow recession). We view this energy cycle as secular rather than purely cyclical, in large part due to the discipline and supply constraints of OPEC+, as well as the capital discipline of U.S. producers. From an equity perspective, we expect to see multiples rise for the group as the market comes to accept the sustainability of the sector’s current very high cash flows.

Like energy, a declining U.S. dollar and Chinese restarts should be positive for the commodity materials, but any outperformance will likely occur through the later half of next year. China’s steadfast commitment to its “Zero COVID” policy will make the timing of any reopening uncertain and continue to overhang global demand. Still, while the threat of global recession looms large for Materials, China provides a huge potential catalyst for outperformance in commodities – if and when its economy fully reopens.



We remain cautious on processed materials (chemicals, packaging), at least until inflation begins to wane and interest rates pause or reverse; when that occurs, they should outperform the market as margins widen. For now, we are more positive on extractive materials (mining, fertilizers).

While Precious Metals have performed better than our earlier expectations, in the near term we are cautious on gold. The combination of slowing inflation and rising rates will create a violent inflection in the cost of carry trade, potentially triggering inventory reductions and pressure on pricing. Gold’s recent outperformance is largely tied to an abrupt decline in the U.S. dollar and a breakdown in the cryptocurrency markets.

Meanwhile, continued high market uncertainty has supported the outperformance of Utilities, but we remain cautious in the medium term. Rising recessionary risk could be supportive for the group, but historically, higher rates have provided an impediment to outperformance. We believe this will be the case through the first half of 2023.

Finally, Real Estate, which underperformed the broader markets in the later part of the year as real rates quickly accelerated, is likely to continue to struggle until interest rates stabilize. While limited, private market Real Estate transactions suggest that public valuations remain discounted, and as interest rate and economic clouds fade, this value gap should narrow.  

While uncertainty remains a dominant phrase in the individual sector outlooks, Real Assets as a group should continue to provide solid protection against rising inflation and weaker economic growth, while setting the base for strong potential performance in an economic recovery.
Stephen Bonnyman
Stephen Bonnyman, MBA, CFA®
VP, Portfolio Manager and Head of Equity Research
AGF Investments Inc.
VP, Portfolio Manager and Head of Equity Research

Stephen Bonnyman is Head of Equity Research and Portfolio Manager of AGF’s Global Real Asset portfolios. Working closely with the AGF research teams, Steve focuses on identifying companies with advantaged business models, solid balance sheets, favourable cost structures, attractive valuations or unrecognized growth. Steve is a member of the AGF Asset Allocation Committee (AAC), which is comprised of senior portfolio managers who are responsible for various regions and asset classes. The AAC meets regularly to discuss, analyze and assess the macro-economic environment and capital markets in order to determine optimal asset allocation recommendations.

He joined AGF in 2013 with more than 20 years of buy- and sell-side experience covering the global materials industry, including five years of institutional money management. Prior to joining AGF, Steve was Managing Director and Mining Analyst at a major financial institution, responsible for global company research coverage and equity market analysis. Prior to that, he was an analyst and portfolio manager at two leading asset management firms.

Steve has a B.Sc. in Geology from McMaster University and an MBA from Dalhousie University. He is a CFA® charterholder.

Registered as a Portfolio Manager under AGF Investments Inc. and AGF Investment America Inc. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

The views expressed in this document are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.

The commentaries contained herein are provided as a general source of information based on information available as of December 6, 2022 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

This document may contain forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed herein.

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RO: 20221128-2610089

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