If Growth Slows, What Happens to Real Assets?
If Growth Slows, What Happens to Real Assets?
Energy could remain a critical feature of the asset class.
The last 12 months have been a volatile period for real assets as markets adapted to rapidly evolving political and interest rate outlooks around the world. As we move on from the U.S elections and acutely watch the evolving political landscape in Europe and Asia, we believe the market is pivoting back to a “higher-for-longer” stance on interest rates and expectations for slowing global economic growth.
The incoming U.S. administration has made its initial policy intentions clear, with a focus on tariffs, immigration and taxes, all of which will have marked potential to be inflationary. Even before taking office, president-elect Donald Trump’s announcement of cabinet selections has provided the U.S. market with greater clarity on the extent and likely intensity of the initiatives.
These policy developments are already reflected in the market, which is broadly reducing duration, leading flows back into quality companies with solid balance sheets and healthy dividends. We expect this broader rotation could support selective and cautious exposures to real assets going forward, because the impact will not be equally distributed across the class.
The energy sector has been a critical feature of the real asset conversation over the last many years, and it will no doubt to be over the next year. But the focus within energy is shifting from oil to natural gas, and from upstream in the energy complex (that is, production and producers) to utilities and electrification. We believe the focus on oil will probably lessen; geopolitical risk has likely peaked, and supply is adequate to meet forecast moderate growth.
Meanwhile, the explosion in demand for data centres has placed a renewed focus on the need for electrical energy availability and security. This has been reflected initially in the nuclear power fleet, but it may be extended to the broader utilities market, including generation, transmission and interconnection. The trend could also stimulate rising demand for everything from real estate to cabling and electrical equipment.
Meeting this need for energy will create increasing demand not just for renewable energy generation, but also for existing fuel sources – notably, natural gas. Already, we are seeing balances in natural gas tighten and prices rising.
Of the broader basis of the U.S. policy initiative, whether one calls it “reshoring” or “onshoring” or “deglobalization,” the net effect is the same: increased domestic industrial production will require commensurate increased demand on industrial real estate, construction and supply/logistics infrastructure. More broadly, in this investing environment of potentially slower global growth and higher rates, real assets may continue to provide a value-generating diversification tool for potentially stabilizing portfolio returns and mitigating market risks.
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.
Richard Fisher is responsible for fundamental research of Financials (Global banks) and the Transport and Transportation Infrastructure sub-sectors. He works closely with AGF’s portfolio managers, providing qualitative and quantitative analysis and recommendations. His support of the team includes company visits and the documentation of research results.
Prior to joining the Equity Analyst team, Richard held several positions within the retail sales division of AGF. Most recently he was Regional Vice-President, having steadily assumed more responsibility since joining AGF in 1996.
Richard earned a B.A. (Honours) from York University and an M.A. in Economics from the University of Waterloo.
The views expressed 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.
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