Asset Class Roundup | Real Assets

Everything Old is New Again

December 6, 2021 | By: Steve Bonnyman

Everything Old is New Again

Real assets are integral to the re-industrialization and greening of the modern economy.

Economic signs point towards inflation being meaningful, though it’s still unclear whether it will be transitory or sticky. Either way, the impact is likely to resonate through the real economy and financial markets in 2022, and real assets, which have benefited over the past year, should stay the course if prices continue to climb. But inflation is not the only catalyst for opportunities in the asset class. Some consider real assets – from commodities and real estate to utilities and transportation – as “old economy” investments, but the fact is that these sectors will likely be just as integral to the re-industrialization and greening of the modern economy as they were to economic evolutions of the past. This is, as Goldman Sachs analysts put it recently, “the revenge of the old economy.”

Real assets are generally cyclical, a function of lower supply elasticity to price and large upfront capital requirements. In the past, many commodities companies have sought to compete with high-growth technology companies for capital by adopting similarly high-growth strategies, which only exacerbated supply overbuilds and resulted in massive wealth destruction. In equity markets, that raised risk premiums, diminished capitalizations and lowered investor interest. Recently, however, management has responded to changing markets – and increased pressure from shareholders to focus on capital return instead of capital destruction – by adopting price-over-volume discipline and return-over-growth strategies. We can see this trend, for example, in the oil markets, where despite a 50% increase in oil prices over the past year, OPEC+ is holding its slowly growing production profile intact; meanwhile, U.S. shale oil production remains below 2020 levels, Bloomberg data show.

Many real assets companies, however, face another apparent headwind. As climate change has become a top-of-mind issue, investors are increasingly focused on environmental, social and governance (ESG) factors. An increasing number of funds (and even lenders) now incorporate ESG considerations into their investment criteria. This is further constraining capital to real asset sectors, which tend to be the most visible (or most upstream) carbon emitters. Many traditional real assets companies have come under pressure to adapt to this changing landscape, while “green economy” companies have been beneficiaries.

A couple of factors might counter this headwind. One is that many central banks have begun to wind down their post-recession quantitative easing (QE) efforts, which tend to stimulate capital markets and generate financial asset inflation, but they do little to boost the “real” economy. The shift away from QE could rebalance demand towards physical assets, which could positively impact commodities demand.

Moreover, the need for physical “stuff” seems to have been underestimated in the new global focus on carbon constraint. Decarbonization of the economy will require immense volumes of copper, aluminum and nickel; batteries and energy storage will require expanded metals and chemicals demand. A lower-carbon future will mean rebuilding energy infrastructure, retrofitting real estate and developing a broad base of electrification. To ramp up these production profiles and build new industrial bases, the need for energy will continue to grow, which could extend the demand for hydrocarbons well beyond the optimistic forecasts of today’s policymakers.

In short, like industrial cycles of the past, the greening of the global economy will depend on the availability and evolution of real assets. That should provide enhanced investment opportunities and improved investor attention through the next investment cycle.

Stephen Bonnyman
Stephen Bonnyman, MBA, CFA®
Co-Head, Equity Research and Portfolio Manager
AGF Investments Inc.
Co-Head, Equity Research and Portfolio Manager

Stephen Bonnyman is Co-Head 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 commentaries contained herein are provided as a general source of information based on information available as of December 6, 2021 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.

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