Wed. Jul 17th, 2024

“To protect your capital, turn to real assets”

By nr39r Jun5,2024
News

This is an interview. For the purpose of financing ever-increasing deficits, central banks will be required to maintain low or even negative real interest rates, according to Francois Collet, who is the deputy director at the DNCA.

“Dince” The stock markets have been flying since the beginning of November, pushed by the possibility of a fall in interest rates. The CAC 40 has surpassed the 8,000 point mark, which is an increase of 7.5% since January 1st, and the S&P 500 has increased by 5,000 points, which is an increase of 11.2%. There was no disruption to the dynamic as a result of the decision made by the Federal Reserve (Fed) to delay the reduction in its key rate in July and wait for the most recent inflation figures. This decision was made in light of the fact that the American economy continues to demonstrate sustained growth, which provides hope for a “soft landing” in activity before a rebound in 2025.

To reap the benefits of diversification and to protect themselves against the effects of inflation, ordinary investors should give serious consideration to devoting up to fifteen percent of their portfolio to real assets.

In order to safeguard the cash in your portfolio, diversifiers are essential, particularly when the market conditions are challenging. The necessity of planning for the future is brought to light by the current tendencies in the market as well as the aftermath of a decade that was both disruptive and destructive. Because of the increased correlation between stocks and bonds, which is the highest it has been in almost thirty years, it is no longer possible to rely on them to give the same diversification benefits that they have in the past ten years. Over the course of the past two years, inflation has reached its greatest point since 1981, and the ramifications of this phenomenon are still being worked out in the economy currently. Additionally, the United States stock market is currently trading at one of its biggest premiums ever, which makes it difficult to anticipate above-average returns in the future at the prices that are currently being offered.

The lower return correlations that real assets have, both within their own asset class and with other asset classes, boost the portfolio’s diversification and provide portfolios with increased diversification. In addition, real assets are a strong inflation hedge that can protect against both anticipated and unanticipated inflation fluctuations. Last but not least, a great number of real asset groupings are currently selling at discounts in comparison to their historical averages, which presents a significant opportunity for growth.

Investors are able to take advantage of the potential benefits that real assets can bring even with a very small proportion for their portfolios.

It is possible that stocks and funds that provide investors with exposure to “real assets”—that is, tangible assets such as infrastructure, real estate, and natural resources, whose value is linked to their physical attributes—could be appealing in an environment where there is robust economic growth, persistent inflation, and higher interest rates.

This is the situation that investors are currently facing. An unexpected rise occurred in the economy of the United States during the first half of 2023, with the economy expanding by 2% on an annualized basis. Current indicators point to further good growth. As a result of a tight labor market in the United States, a limited supply of housing, and rising energy prices, inflation is proving to be a persistent problem. These price pressures are causing the Federal Reserve to maintain interest rates at historically high levels for a longer period of time than was originally anticipated. In consequence, higher rates could have a negative impact on the valuations of some U.S. shares, leaving the benchmark stock indices of today, which are already highly valued, vulnerable.

Under those conditions, the following are some of the reasons why investors would find it beneficial to have exposure to real assets.

Real estate is a good investment for three reasons.

Although it is feasible for investors to include real assets in their portfolios – for example, by purchasing gold or a stake of a building – doing so can be more challenging and perhaps more hazardous than investing in stocks or funds that offer exposure to real assets rather than real assets themselves. The following are some of the potential advantages that could result from doing so:

Real assets have a tendency to increase in value along with inflation because they contractually or directly pass on increasing prices to customers. This allows investors to maintain pace with inflation, which is a hedge against inflation.

Potential for competitive returns: To begin, stocks and funds that have exposure to real assets have the ability to offer a continuous income stream for investors, regardless of the economic situation or short-term swings in the market. It is also possible for real assets to perform better during times of stronger “nominal” economic growth, which refers to the rate of economic development before inflation is taken into account.

Stocks and funds that have exposure to real assets have historically had low correlations to other stocks and to each other. This means that their value does not tend to closely mirror the ups and downs of these other assets. Diversification potential: Stocks and funds that have exposure to real assets have consistently had low correlations. For instance, in the event that traditional investments experience a drop, certain real assets may be able to assist in providing stability and limiting overall losses in a portfolio.

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By nr39r

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