FINANCE TODAY | ISSUE NO.29
ECONOMIC RECOVERY VARIABLES
As the world slowly navigates towards recovery and past the turmoil of 2020, the global real asset markets will follow suit. There are numerous factors that will play an important role in determining how quickly and in what direction the markets head as they start to recover. Vaccine rollout will be a key catalyst to returning to some sort of normalcy, especially in North America and Europe where poor virus containment has challenged economic activity. Shifting geopolitical risk is another area of focus, as the Biden administration tables different trade and other policy priorities. Interest rates are also relatively low, but a rise in rates has the potential to induce higher inflation. The growing importance of ESG practices to mitigate the damage from climate change is expected to boost economic growth and impact the real asset market. Further, despite the economic setbacks of 2020, capital flows into real assets remained robust. Both infrastructure and closed-end real estate funds experienced inflows of $160 billion USD (Synnot. et al., 2021). These are simply portfolios of pooled assets similar to a mutual fund. A survey by Blackrock also indicates that 55% of investors intend to increase their real asset allocations into 2021 (Synnot. et al., 2021). Of course, some real assets have withstood the pandemic better than others. Renewable energy, essential infrastructure such as pipelines, and storage, and digital assets such as cell towers were a target for investors, whereas transport and some parts of the real estate sector did not fare as favourably. The performance of the real asset market was clearly bifurcated in 2020 and is expected to recover in a similar manner.
THEME FOR 2021: THE TREND IS YOUR FRIEND
The COVID-19 pandemic has undoubtedly acted as a catalyst for permanent changes. The way people live, work, and interact is being altered, however, many of the changes that are now being implemented were a long time coming. If anything, the pandemic has shortened the time horizon on innovation adoption. An important thing to note is that these trends are not evenly distributed and benefit some sectors more than others. Additionally, there are short-term trends called tactical opportunities, and longer-term trends called strategic positioning. Investors can benefit from both, but must be aware of this difference. Some trends that Blackrock predicts will be beneficial include technology-driven sectors and social trends. Trends will provide strong momentum in the coming years and investors must be ready to take advantage of them.
The U.S economy has reached the beginning of the end of the COVID induced economic downturn, with meaningful progress being made in the labour market and investor sentiment looking up as more vaccines are rolled out. However, there is still a long way to go. An important factor that will impact the U.S real asset market is the Biden administration’s approach to energy and climate change. Infrastructure in particular is a market segment that is predicted to be positively impacted through the trends of decarbonization and digitalization. The U.S. Solar and wind’s levelized cost of energy has fallen dramatically over the last 10 years, and has enabled the sector to quadruple its contribution to overall U.S power supply (Synnot. et al., 2021). The levelized cost of energy is a way to measure the total average cost to build and operate an asset. The pandemic has accelerated the demand for data centers, including data and fibre, which will have a lasting positive impact on the infrastructure segment.While the industrial segment benefits, the retail real estate segment loses. The shift to e-commerce and in-person restrictions have weighed heavily on retail spaces, resulting in a very uncertain recovery. Overall, the U.S economy is not out of the woods yet, but the future seems promising for some real assets.
European economies are one step ahead of the U.S in that some regions have begun to re-open more fully. The European job market was not as hit as hard, which reflects the success of short-term working schemes in protecting jobs. Similar to the U.S, European industrial and logistics real estate has a positive forward trajectory, whereas retail is continuing downward. Deglobalization is already underway in most European countries and this trend is expected to continue, with domestic supply chain and infrastructure sectors benefiting greatly. Europe is also ahead of the U.S in terms of renewable energy, and competition for renewable assets is extremely high. Offshore wind presents a scalable opportunity with growth focused on the coastal regions of Europe. There are numerous opportunities for growth in the European real asset market, however they too still have an uneven economic recovery ahead.
REAL ASSET OVERVIEW
2020 was an extremely turbulent year that presented many unique opportunities. Many businesses were able to pivot and capitalize on the situation in order to foster innovation. A growth in ESG techniques and the demand for certain infrastructure all point to a bright future for the real asset market. By taking advantage of trends, investors in this area are expected to reap many rewards in the future. Throughout different geographical areas and varying levels of economic recovery the consensus is clear: although the market is changing, the future is still very promising for real assets.
Synnott, A., Cornet, S., Durkin, S., Wan, B., Yu, W., Parpa, C., . . . Tawney, E. (2021, January 3). 2021 global real ASSETS outlook – institutional. Retrieved February 28, 2021, from https://www.blackrock.com/institutions/en-us/insights/investment-actions/global-real-assets-outlook