Investing in real assets for an uncertain outlook
Global stocks are trading well above their average valuation over the past 15 years, while interest rates available on global fixed income remain close to historically low levels, making it harder for investors to generate growth and income. While Nuveen’s Global Investment Committee does not see a global recession on the horizon, publicly traded asset classes offer more modest return outlooks today than they have in recent decades. Therefore, we believe that alternatives such as real estate and farmland can add value in a variety of economic scenarios. But asset class diversification and manager selection are likely to be key in determining absolute and relative performance.
The thousand-foot view
2019 marks the 10-year anniversary of the end of the global financial crisis. The U.S. economy exited its great recession in June 2009 and has since staged its longest uninterrupted expansion in history. Investors who were willing to take risks 10 years ago have been richly rewarded for doing so. Meanwhile, global interest rates have failed to return to levels that would have been regarded as merely average prior to 2008.
While we do not believe the historic length of the current expansion makes a near-term recession more likely, we also cannot credibly expect publicly traded financial assets such as stocks and bonds to match their performance of the last decade in the next. Investors seeking to maintain their recent level of returns will very likely need to maneuver their portfolios to include more risk assets, more alternative assets or a combination of the two.
As we foresee slow global growth, geopolitical tensions rising and more volatility in the near-term, we believe investors may consider focusing on the less correlated, inflation-protected and long-term capital appreciation characteristics found in real assets. Many real assets, particularly real estate and farmland, have proven resilient in economic environments similar to where we are now.
How are publicly traded assets priced today?
The decade since the crisis has been the most fruitful for diversified investors in global stocks and bonds since the one that ended at the peak of the technology bubble in the early 2000s. A 60/40 portfolio of the MSCI All-Country World Index (global stocks) and the Bloomberg-Barclays Global Aggregate Index (global bonds) returned 7% on average per year from July 2009 through June 2019.1
That’s close to the best 10-year performance since the 1990s. While we don’t expect a “lost decade” for stocks akin to the 2000s, we also do not expect returns in the 2020s to match those in the 2010s given stocks’ relatively high valuations and bonds’ relatively low interest rates.
U.S equities in particular have provided the bulk of the returns on the global index since 2009. Over the next 10 years, however, their current price-to-earnings ratio — the best single predictor of returns over a 10 year horizon — implies an average total return of only 4% – 5% annually through 2029, less than a third of what they’ve provided over the past 10 years (Figure 1).
How do alternatives fit in?
Alternative asset classes such as real estate and farmland have the potential to improve the efficiency of an existing portfolio and provide sources of income that are relatively uncorrelated to both companies’ dividends and bonds’ coupon payments. Currently, the yield on U.S. commercial real estate across a variety of sectors and geographies remains historically wide compared to that of the Bloomberg-Barclays U.S. Aggregate Index (Figure 2).
While the global financial crisis certainly taught us that bubbles and busts can form in private markets just as they can in public ones, most alternative asset classes are subject to far less volatility on a month-to-month or even quarter-to-quarter basis. And while they are not immune from the ravages of a local or global recession, it is possible to build a portfolio of alternatives that emphasizes the quality and durability of income stream even during periods in which the underlying asset value is static or falling.
Not one cycle but many
Global growth does not run on a single engine. Nuveen’s Global Investment Committee outlook calls for virtually all major economies to remain in expansion mode through the balance of 2019 and beyond. But unlike the U.S., which has experienced a nominal rise in interest rates and an uninterrupted equity bull market since the global financial crisis, most areas of the world are not at the same stage of their economic cycles. Assets tied to local economic activity such as real estate and farmland do not rise and fall in price equally in all regions at all times. As much if not more than the global equity market, global alternative assets can move independently of one another and in so doing provide risk-mitigating diversification if structured correctly in a portfolio.
In the event of a recession…
If we are wrong in our outlook and a severe slowdown hits one or more major economies in the next few years, we believe diversification by asset class and by geography could provide a buffer against catastrophic market loss. For alternatives, in particular, a recession can be an opportunity to acquire undervalued assets meant to be held for long periods. More broadly, regardless of the prevailing economic and market environment, we think alternatives can and should play a role in a diversified portfolio.
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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 is no guarantee of 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.
Sharpe Ratio (Risk-Adjusted Return) is a risk-adjusted return measure calculated using standard deviation and excess return to determine reward
per unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance. The “Shiller” P/E Ratio is a valuation measure that
uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business
cycle. Bloomberg Barclays U.S. Aggregate Index represents securities that are SEC registered, taxable and dollar denominated. The index covers
the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities
and asset-backed securities. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a
correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect
negative correlation (a correlation co-efficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation
is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. The MSCI
ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging
Markets (EM) countries. With 1,853 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. The FTSE
NARIET All REITs Index is a market capitalization-weighted index that and includes all tax-qualified real estate investment trusts (REITs) that are
listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The NCREIF Farmland Property Index is
a quarterly time series composite return measure of investment performance of a large pool of individual farmland properties acquired in the private
market for investment purposes only. The NCREIF Property Index (NPI) is a quarterly, un-leveraged composite total return for private commercial
real estate properties held for investment purposes only. The NCREIF Timberland Index is a quarterly time series composite return measure of
investment performance of a large pool of individual timber properties acquired in the private market for investment purposes only. The Russell 3000
Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. S&P 500
Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. S&P GSCI Agriculture
Index has been designed to provide an exposure to the agriculture sector in commodity asset class on a total return basis. The S&P Global Timber
& Forestry Index is comprised of 25 of the largest publicly traded companies engaged in the ownership, management or the upstream supply chain
of forests and timberlands.
A word on risk
Investing involves risk; principal loss is possible. 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. Foreign investments involve additional risks,
including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Alternative investments
may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing
or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory
requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative
investments are not suitable for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of
the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future
results, and there can be no assurance that comparable returns will be achieved by any strategy. 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 estate investments are subject to various risks, including fluctuations in
property values, higher expenses or lower income than expected, currency movement risks and potential environmental problems and liabilities.
Farmland investments 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.
Nuveen provides investment advisory services through its investment specialists.
This information does not constitute investment research as defined under MiFID. In Europe this document is issued by the offices and branches of
Nuveen Real Estate Management Limited (reg. no. 2137726) or Nuveen UK Limited (reg. no. 08921833); (incorporated and registered in England and
Wales with registered office at 201 Bishopsgate, London EC2M 3BN), both of which entities are authorized and regulated by the Financial Conduct
Authority to provide investment products and services. Please note that branches of Nuveen Real Estate Management Limited or Nuveen UK Limited
are subject to limited regulatory supervision by the responsible financial regulator in the country of the branch