Inflation outlook 2022: weathering the storm with real assets | Alternatives

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Inflation will be closely watched by asset owners until 2022, and even if stagflation were to hit the market, investors see diversified real assets across the globe as the best way to overcome inflationary pressures. These assets won’t be a complete balm, but they should help lessen the impact.

“It’s not as if your tilt towards real assets is going to turn a negative portfolio from a stagflation scenario to a positive one, but it will soften [some of the negative]Said Matthew Peter, chief economist at Queensland Investment Corporation (QIC). “And that’s going to subside by about five percentage points over a five-year horizon,” Peter said. AsianInvestor, noting that even a traditional 60-40 equity and bond portfolio would mitigate these risks if it was slightly biased towards real assets.

Matthew Peter, CIQ

Overall, QIC seeks a return of 9-11% for its infrastructure portfolio and 5-9% for its real estate investments, depending on the type of asset.

As the world recovers from the pandemic, inflation and even stagflation has become the main concern of the market. In the United States, the inflation rate reached 6.2%, the highest in more than three decades.

“The idea that inflation was transient has been questioned. And now there’s reason to believe that some of the inflationary pressures we’re seeing are more structural, ”said Belinda Boa of BlackRock, head of active investments for Asia-Pacific (Apac) and director of equity market investments. emerging.

“With economic decoupling comes higher costs. The same goes for the massive shift to sustainability. Wage inflation is more structural. Central bank normalization will therefore remain a key market objective over the course of time. the next six to 12 months, ”Boa told BlackRock’s 2022 Outlook webinar. .

Belinda Boa, BlackRock

THE OUTCOME

Meanwhile, QIC presents four scenarios for the direction the global economy could take: Goldilocks, or transitory inflation; stagnation; benign overrun of inflation; and stagflation, according to its report published November 25. Whatever the scenario, he sees investing in real assets as the key strategy.

Three factors should be considered when investors are looking for hedge assets in an inflationary environment, said Peter of QIC.

First, they should be assets whose cash flows are closely linked to movements in the Consumer Price Index (CPI), such as commercial real estate like shopping malls with a strong track record, a- he noted.

Large regional shopping centers in Australia have been an important part of QIC’s core real estate strategy. Their sales income has contributed to some decent returns for QIC lately. In the core plus strategy, the sovereign wealth fund also has proximity centers with a foothold in supermarkets.

“We would have an expected return differential between these types of assets. The lower the volatility, the trade-off is obviously a lower expected return, but this gives ballast to the portfolio, which we can increase in terms of return through non-cores, ”said Peter.

“The second idea is that you want assets that are going to protect you from stagflation where growth is falling. You want assets that have a low correlation with economic activity, that don’t have ups and downs, ”he continued.

This includes investments in infrastructure in utilities, toll roads, ports, social infrastructure such as retirement homes and public health centers.

Peter emphasized that it’s important to have a diversified portfolio of real assets by carefully considering their theme, rating and valuation, rather than just looking for assets based on their location.

The end idea is to invest in assets that can reduce the risk of the capital structure through fixed rate debt or through interest rate hedging.

Natural resources such as agriculture also have a long history of outperforming in times of inflation, added Peter, noting that Australia’s rich natural resources can become a good hedge for investors.

QIC managed $ 69 billion in assets at the end of June, of which 31% in global infrastructure and 18% in real estate. As a state-owned investment manager, the majority of its assets are entrusted to the Queensland government, with the remaining assets coming from other Australian super funds and foreign asset owners, particularly in North Asia. , Singapore, Europe and North America.

NO PERFECT HEDGE

Jang Dong-hun, Poba

Likewise, Korea’s $ 15 billion Public Officials Benefit Association (Poba) also considers its portfolio of alternatives to be resilient in the face of mounting inflationary pressures.

“In comparison, I think we are better prepared for higher inflation than asset owners who have fairly large exposure in traditional asset classes,” said Jang Dong-hun, chief investment officer.

Poba invests 58% of its assets in the private market, mainly in Korea, Europe and North America. This includes over 10% of fixed income assets such as private debt, infrastructure debt, real estate debt, and structured notes.

“When there is a rise in interest rates, we can pass some of it on to customers or tenants, so the impact on our portfolio is manageable,” Jang said. AsianInvestor, noting that it believes there is still room to increase current inflation levels.

“However, if inflation is rising very quickly – depending on how fast it is, as well as how fast the Federal Reserve is raising rates – and the 10-year US Treasury yield hits levels of 4% or 5% , higher than rent or user fee increases, then I think a negative impact, especially on fixed income assets, will be inevitable, ”he said.

The 10-year US Treasury yield stood at 1.5% this week. It was above 4% before the 2008 financial crisis.

“We continued to try to have more exposure to real assets and more revisable rate products. Now, inflation is inflation. In an environment of higher inflation, there is no perfect hedge and a negative impact is inevitable, ”Jang pointed out.


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