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How do rising interest rates affect natural capital investments?
Our analysis provides evidence of timberland and farmland’s resiliency through rising interest rate environments and associated contractionary economic environments.
To address persistent U.S. inflation, the Federal Reserve initiated a series of rate hikes in March 2022. By May 2023, the key short-term interest rate had increased by 5.0%, reaching its highest level in 16 years. Recognizing that the impact of higher interest rates on portfolios will vary by sector and investment characteristics, many investors are wondering what the current rate environment means for their natural capital portfolios.
In this paper, we examine the impacts of a rising interest rate environment on natural capital investments: U.S. timberland and U.S. farmland. We review past performance through periods of rising rates, then conduct a deep dive into the individual asset classes to examine the mechanisms through which higher interest rates are translated most immediately and directly to rate-sensitive market segments. Finally, we conclude with a summary of what this means for natural capital investors.
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Our research shows that farmland and timberland investments continue to serve as a hedge against inflation and provide tools for investors to build resilient portfolios.
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The earth’s natural capital can be thought of as a stock of assets—air, lands and waters and their biodiversity— that yields a flow of benefits or ecosystem services over time. The flow of these benefits includes provisioning services such as food, fiber and timber as well as a broad range of regulating, supporting and cultural ecosystem services that drive the global economy and human wellbeing.
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Endnotes
1 Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, May 15, 2023.
2 See for example Goolsbee and Syverson, 2023 (https://www.nber.org/papers/w30845). Modular mass timber construction may offer some relief to productivity challenges in the construction sector, and climate benefits in addition (https://www.nuveen.com/global/insights/alternatives/mass-timber).
3 Debt-to-equity ratios for 2022 and 2023 are forecasts.
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This material may contain “forward-looking” information that is not purely historical in nature. Such information may include projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. Views of the author may not necessarily reflect the view s of Nuveen as a whole or any part thereof.
Past performance is not a guide to future performance. Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate. This information does not constitute investment research as defined under MiFID.
A word on risk
As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Nuveen provides investment solutions through its investment specialists.
