Private and public real assets
Opportunities and positioning
We think it makes sense to focus on more defensive areas of the real assets market. The broad macro backdrop continues to look somewhat challenging for both public and private real assets. Easier global monetary policy has been promoting additional liquidity, which has been a plus. But slow global growth means that downside risks remain relatively high. Geopolitical uncertainty (including in the Middle East, Hong Kong and Chile) has added to volatility.
In public markets, defensive growth areas look more attractive than more cyclical sectors. REITs and listed infrastructure performed well in 2019 and have income and stability characteristics that should continue to appeal to investors. We have an especially favorable view toward the logistics and data center industries.
Within public infrastructure, we like utilities and toll roads and prefer more highly regulated utility companies with no or low exposure to commodity prices.
On the private real assets side, farmland and timberland asset values remain supported by low global interest rates. Issues such as trade volatility, the multi-year drought in Australia and the expansion of African Swine Flu in Asia require investors to approach these asset classes with careful selectivity, however.
Although we continue to be constructive on agribusiness private equity generally, broad valuations appear rich with debt levels creeping higher. Discipline and sourcing remain critical.
Risks to our outlook
Rising interest rates would work against defensive positioning in the public real asset space. Likewise, stronger-than-expected growth would boost the more cyclical areas of the market.
Additionally, trade issues continue to represent risks across all real assets. We think ongoing uncertainty on this front will likely mean that market volatility will remain elevated.
Portfolio context for real assets and real estate
Global real assets and real estate, particularly those not correlated to downstream commodities, are a good source of idiosyncratic risk, which helps embed more diversification into portfolios.
Given our expectations on the business cycle, we think long-term rates have limited room to rise significantly from here. We like public real estate and real assets as a defensive growth alternative to market-cap-weighted indexed equity exposure that also provide a hedge against an upswing in inflation expectations from current low levels.
Real assets can provide income for institutional portfolios. We prefer sourcing income in real assets as opposed to lower quality corporate debt.
Liquidity remains a concern. Given that private market access is a key requirement for many sectors of the real estate and real asset markets, we recommend investors maintain their long-term strategic asset allocation split between public and private assets.
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