Thank you for your message. We will contact you shortly.
Farmland: Cream of the inflation hedge crop?
Bottom line up top:
- Inflation’s hitting the high notes. Oklahoma!, Rodgers and Hammerstein’s 1943 musical, yielded a bounty of now-ingrained cultural references, including the expression “as high as an elephant’s eye.” Today, that analogy applies not only to tall cornstalks but also to inflation — which still looms above the 2% target set by numerous central banks. In the U.S., year-over-year headline inflation stands at 4.9% and 4.4%, as measured by the Consumer Price Index and Personal Consumption Expenditures Price Index, respectively. At this point, the Federal Reserve isn’t quite ready to let its higher-for-longer rate landscape lie fallow.
- Employment data is writing the score. What might make the Fed change its tune? More slack in the labor market. The number of open jobs and the availability of workers to fill them remains out of whack, putting upward pressure on wages, an important factor in the inflation equation. U.S. job openings increased to 10.1 million in April — far more than consensus expectations and nearly double the historical average. In contrast, the job quits rate declined for the second consecutive month. This metric typically leads wage growth by two to three quarters and may be a more useful gauge of labor market tightness.
Weekly first-time unemployment claims have been moving sideways (Figure 1). For the most recent reporting week, they ticked up to 232,000 but were lower than forecast. Notable movement in one direction or the other could offer a clue as to the Fed’s next move.
Monthly payrolls show a hot labor market that isn’t cooling fast enough for the Fed to consider rate cuts, but we could see a pause this month as the central bank takes time to interpret the data. Employers added a shockingly high 339,000 new jobs in May, while average hourly earnings rose 4.3% year-over-year, a tick lower than in April but still a healthy gain. One sign of weakness: The unemployment rate climbed to 3.7%.
- You can’t reap if you don’t sow. Despite labor market resilience and optimism amid last week’s deal to avert a U.S. government default, we still foresee a mild U.S. recession, although it’s likely been delayed from late 2023 until some time in 2024, as the growth-dampening effects of tight monetary policy work their way through the economy. In the meantime, with high inflation likely to persist, we think investors would be well-served by allocating to real assets that can provide meaningful inflation protection. Farmland could be a good place to start.
[Like what you’re reading? Sign up here for Nuveen’s weekly CIO commentary to receive content like this delivered to your inbox every Monday.]
Given still-strong upward pressure on wages, we don’t anticipate the Fed will be looking to cut rates in the near future.
Real assets — historically an effective hedge against inflation — appear well-suited for the current backdrop. Many commodities, such as foodstuffs and raw materials, are components of inflation measurements. As their prices rise, so do the revenues and cash yields for real assets producing these commodities. Additionally, areas such as farmland and timber tend to be less affected by factors that cause day-to-day swings in stock and bond markets, offering a potential source of portfolio diversification.
Investors should consider how much to allocate to real assets, the ability of the asset class to generate attractive risk-adjusted returns and the overall correlations within a portfolio. Figure 2 compares the historical performance of a traditional portfolio consisting of stocks and bonds to portfolios that include real assets, including farmland. While adding farmland on its own significantly improved the historical Sharpe ratio (a measure of risk-adjusted return), other categories of real assets provided benefits as well. Our analysis showed that allocating 5% each to farmland, timber, real estate and infrastructure would have offered compelling results.
Lastly, in addition to hedging inflation, real assets can potentially enhance the defensive posture of a portfolio, making them worthy investment candidates in advance of a possible recession. Farmland and infrastructure, for example, provide basic necessities, so the demand for the goods and services they produce should be resilient in a weakening economic environment.
Real assets, including farmland, offer the potential to improve risk-adjusted returns in a portfolio.
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Investors should be aware that alternative investments are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Real asset investments may be subject to environmental and political risks and currency volatility.
Nuveen provides investment advisory services through its investment specialists.
You are on the site for: Financial Professionals and Individual Investors. You can switch to the site for: Institutional Investors or Global Investors
Not registered yet? Register