Are Real Assets Being Overlooked?

By Salvatore Bruno via

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.

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