Transcript: Market exuberance ignores potential threats on the horizon
Vince Childers of Cohen & Steers says real assets are a hedge against market volatility and under-capitalization in critical sectors
- Featuring: Vince Childers
- September 17, 2024 September 14, 2024
- 13:01
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Vince Childers
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking with Vince Childers, head of real assets multi-strategy with Cohen & Steers. We talked about why the timing is right for investing in real assets, how 2024 has played out so far, and we started by asking about real assets in an elevated interest rate environment.
Vince Childers (VC): In terms of interest-rate impacts on real assets, I think we’ve seen plenty of rate volatility. Five, six, maybe seven cuts were priced for the Fed actually, at one point, way back in January, and we thought that was not realistic against the backdrop of still pretty robust inflation and tight labour markets. We thought the market had gotten a bit of ahead of itself. But, actually, if you look at something like the 10-year yield, we basically kind of round-tripped it, and we’re back to where we were at the beginning of the year, sort of 3.9% or 3.8% kind of range. But interestingly, the best performing real assets for us have been the assets that you typically would say are more rate sensitive – namely infrastructure and real estate — and they are respectively the two best performers in our portfolio. It’s actually been more the commodity complex – the resource equities and commodity futures – that have lagged a bit. And there are reasons for that etc. But on the whole, I would say the interest rate story has not had as big of an impact as a lot of people maybe would think.
His “core four” real assets
VC: So, 2024, for real assets, when we think about it in terms of absolute returns, it’s been a pretty decent year. So, we’re looking at numbers, depending on the portfolio and the construction, in the sort of 8% to 10% type of range. Our biggest overweight in the portfolio is to listed infrastructure. We think there’s a little bit of mixed economic data, and that leads us to have a preference for things that we think can perform well in a below-trend type of growth environment. Where that pushes us right now is toward companies that are at an inflection point in terms of power demand. We look at things like data centers, certain types of utilities. Ultimately, we’ve got a story where there’s going to be a need for a lot of electric and gas infrastructure in the years ahead to support likely power demand. Favouring these types of power demand themes, we think is going to serve us well, again in addition to having that sort of more defensive tilt. Resource equities, there’s still a lot of really attractive free cash flow production coming out of the resource equities. We’re actually still overweight there as well. If we just take major energy companies and even a lot of E&Ps [exploration and production] – we’re talking about low double digit to even mid-double digit type free cash flow yields. We have seen cheaper valuations in the last three, four, five years, but they still look pretty attractive to us. And then in order to fund those overweights, we have to obviously be underweight something else. So, we’re underweight in commodity futures. I think there’s some concerns on the oil side, around the potential for excess supply. We’ve seen some worries around China really creep in on a lot of your industrial metals. There have been some supply worries on the grain side as well. So, we just think kind of fundamentals in the short term look a little rough for commodity futures. And then probably the most surprising underweight is real estate. Our models and our thinking says that if we combine the valuation and growth expectations in infrastructure along with its defensive qualities that the edge would go to infrastructure over real estate. So, a little bit of a nuanced perspective there, but that’s how it’s shaken out for us within the real-asset universe.
And finally, what’s the takeaway on investing in real assets in the current moment?
VC: I think we have a lot of investors really enthralled with the AI investment story and the anticipated payoffs around it. We’ve characterized it as a kind of AI fever. There’s a lot of exuberance baked in at this point. What that has caused a lot of market participants to overlook are actually some growing near-term cyclical or growth risks. This AI fever has really driven people away from any kind of focus on the supply-side issues that we see in the economy, say, a decade ahead – something that we’ve characterized in some of our publications as ‘an era of scarcity.’ We’re in the middle, we think, of a substantial commodity underinvestment cycle that could lead to issues of under supply there in the years ahead. I would just say there seems to be very little appreciation for that risk baked into market prices. So, historically, that kind of environment, where you have inflation surprises to the upside and growth to the downside – more of the supply driven type of inflation – has favoured real assets significantly.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Vince Childers of Cohen & Steers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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