Real assets – commodities, precious and industrial metals, timber and coal, for example – have been off the radar for many investors as markets – and market coverage – have focused obsessively on the Fed and the impact of interest rates on stocks and bonds.
Commodities sold off sharply at the end of 2018, hammered by multiple factors including trade disputes, disappointing data out of China, and concern for global growth broadly. Oil in particular had a rough 4Q before rallying on an anticipated OPEC supply cut. Soybeans, too, were caught up in the trade imbroglio as China, the biggest U.S. export market, hit U.S. soybeans with a 25% tariff1.
In spite of this short-term performance, longer-term trends continue to support the case for maintaining exposure to real assets. Viewed from the most fundamental level, no one’s making any more farmland even as the global population continues to expand, and all natural resources are ultimately finite. At the same time, the World Bank estimates that both emerging and developed economies will continue to grow and consume resources, with global growth expected to average around 4.7% in 2019-2020. Emerging markets have been the primary drivers of resource demand: over the last 20 years, most of the growth in metals, and two-thirds of the growth in energy consumption, has come from the seven largest emerging markets. While this is expected to taper off, it still provides an underpinning for global demand.
Much the same can be said for demand for other components in this asset class, including timber and water. Precious metals, and gold in particular, continue to act as a store of value and a hedge against the unknown. Not surprisingly, gold has rallied in the face of market volatility. Oil, too, may have found a bottom; median forecasts have Brent crude at $68 a barrel by the spring, up from about $57 a barrel now. Copper, with its fortunes largely tied to the industrial economy, had a tough 2018, but the prospects for 2019 look brighter based on emerging markets demand and potential progress on trade.
Real estate, as measured by the Dow Jones U.S. Real Estate Index, was down for the year as well, pressured by rising interest rates. December was particularly rough, with the broad REIT market falling -7.73%, according to the trade association NAREIT. Still, this was better than the S&P 500 which fell a little more than 9% for the month. The outlook for 2019 is cautiously optimistic. In addition to the opportunity for appreciation, REIT yields are attractive, with the yield on the FTSE NAREIT All REIT Index standing at 4.84% in the first week of January. The 30-Day SEC Yield (subsidized and unsubsidized) for the IQ U.S. Real Estate Small Cap ETF (ROOF) was 6.77 % as of December 31, 20182.
There is no disputing that commodities can be volatile (but so can equities, as we’ve seen). But for most of the asset class, the current downward pressure could unwind fairly quickly if the U.S.-China trade dispute can find a reasonable resolution. A less aggressive Fed would provide further support. And there’s another potential plus as we head into the 10th year of the expansion: commodities have tended to outperform other asset classes late in the economic cycle.
In sum, real assets are often overlooked but shouldn’t be: they can play a constructive role in a diversified portfolio for many investors. Entering the new year, it’s a good time to give this important asset class a look.
1. Lundgren, Luke and Bonato, Gustavo; “2019 Outlook: Soybeans bumpy ride to continue on U.S.-China tensions, large supplies and Brazil logistics”; www.spglobal.com.
2. SEC 30-Day Yield is based on net investment income for the 30-day period ended 12/31/18 divided by the offering price per share on that date. Unsubsidized SEC 30-Day Yield reflects what the yield would have been without the effect of waivers and/or reimbursements. There was no distribution for the 30-day period ended 12/31/18.
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