The Case for Real Assets
Buy Humiliation, Sell Hubris: price relative of real assets (real estate, commodities, collectibles) to financial assets (stocks & bonds) at its lowest level since 1926; US stocks close to all-time highs versus US house prices; US bonds at all-time highs versus diamonds (Chart 1); 10-year rolling return from commodities lowest since 1933.
Peak Deflation: real assets positively correlated with inflation; stocks & bonds negatively correlated with inflation; central banks are withdrawing stimulus as deflation fears subside; real assets hedge against inflation & monetary tightening; real asset relative performance has 82% correlation to Fed funds rate since 1950.
War on Inequality: commodities, real estate & infrastructure are natural beneficiaries of a “War on Inequality” waged via fiscal stimulus.
Cheap Value: real estate (REITs 3.3%, timber 2.6%, agriculture 2.6%) & infrastructure (3.2%) are higher yielding assets than global stocks & bonds.
Positioning: Asset allocation to real assets is low but on the rise (just 8.2% of total ETF market cap is exposed to real assets; pension fund up from 9% to 24% past 15 years).
Beneficiaries: 9 ideas to gain exposure to the Real Asset theme…energy stocks, infrastructure, TIPS, timber, etc. See pages 8-9.