While the fallout from the pandemic has accelerated several long-term trends, it has also given rise to some misguided expectations. The crisis has paved the way for a new economic cycle, which could be depicted by a resurgence of inflation. Real assets are emerging as the major beneficiaries of this new environment. They appear to meet the global economic challenges, as well as the expectations of institutional and retail investors with regards to both performance and impact.
After more than a year of the Covid-19 crisis, the health situation seems to be improving overall, despite some worries about the spread of the Delta variant. We can hope that a normalisation will be achieved, allowing us to emerge from the repeated ‘stop-and-go’ episodes experienced by the economic and financial world over the past 18 months. There is also hope for a return to a sustainable economic trajectory.
Inflationary pressures are on the rise, especially in the United States. Supply chain disruptions could fuel this inflationary situation. It is too early to know whether this trend will be temporary or structural, but it is vital to seek protection against a resurgence of inflation as certain safe asset classes could be exposed.
In this context, real assets appear to be the ‘winning bet’ for the post-Covid-19 world, as they have the potential to combine protection against inflation with the prospect of higher returns than traditional liquid assets. According to our analysis, over the next ten years, real and alternative assets could offer an extra return over traditional asset classes worth 200-500 bp, depending on the asset class. This extra income opportunity could approach the higher bound of this range through an active asset picking policy. Such a sizeable spread of anticipated yields should accelerate capital flows into real assets as investors seek to optimise their risk/return trade-off.
As illustrated in figure 2, the inclusion of real and alternative assets into portfolios might bring significant benefits in terms of diversification for those investors with an adequate long-term investment horizon. For both moderate and high-risk profile investors, the inclusion of alternative assets warrants the achievement of their respective targeted returns of 3% and 5%, with lower volatility and Conditional Value at Risk (CVaR).
For the moderate-risk profile, the allocation to real assets accounts for around 10%, which is achieved through a marked reduction of the exposure to global equity and global HY. For the high-risk profile, the allocation to real assets accounts for the maximum portfolio share allowed (25%) and is financed by a reduction in the exposure to risky assets, particularly DM equities, with the allocation to global HY cut to 0%. This would help rein in portfolio volatility. In both cases, the optimisation confirms a preference for real estate and infrastructure within real and alternative assets.