Real assets could see a lift
How should investors respond to the renewed widening in real asset risk premia amid lower interest rates? Wil the weight of investor capital looking to invest spur further price increases?
Paul Guest
Lead Real Estate Strategist for Real Estate Research & Strategy
Recent months have seen a profound change in the monetary policy outlook globally that has important implications for the demand, pricing and performance of real assets in general in 2020 and for real estate in particular.
In a relatively short space of time, the policy stance of central banks including the US Federal Reserve (Fed) has gone from neutral or modestly tight to slight easing. This policy shift includes the re-introduction of quantitative easing (QE) in Europe and in the US, despite the Fed's protestations that its repo purchases should not be considered as QE.
Deteriorating economics trigger real assets reassessment
This precautionary easing is seen as necessary in light of a deteriorating economic outlook. Political uncertainty looks set to continue dampening business investment and job creation. If anything, we see this intensifying in 2020. With the issues separating the US and China deeply embedded in domestic political interests, the trade disputes between the two countries are likely to rumble on. The US has other trade disputes on its agenda, not the least over automobiles with trading partners including the EU and Japan. In addition, the US Congress is bitterly divided. Elsewhere, Brexit and the Japan/South Korea trade war both pose additional risks. Political risk does not directly influence real assets in the short-term. However, the longer business investment is depressed, the worse it is for an economy over the longer-term, and that will inevitably impact demand for real assets.
Consumer and capital strength will boost real assets
In our view, investors should be a little more conservative about the demand side of the real asset equation, but not markedly more pessimistic. Central banks are attempting to sustain the same rates of growth, but they now believe that slightly easier policy is needed in order to achieve it. In September, the US, the world's largest economy, completed its 123rd consecutive month of growth, the longest expansion since records began in 18541. Long expansions are good for real assets, particularly when new supply remains broadly in line with demand and vacancy rates are comparatively low. In most cases, this will remain true heading towards 2020.
We expect flat to positive capital value growth
Another area that deserves investors' attention is the outlook for leverage in the real asset space. Borrowing costs have been low throughout this cycle. But a mix of risk aversion in the wake of the most recent financial crisis, increased regulation of banks, and the expectation of rising long-term interest rates kept loan-to-value (LTV) ratios historically low. Now that long-term interest rates have fallen anew, it would be natural for an increased number of investors to look to leverage to boost their returns.
For more insights from Paul and the team, visit our Real Assets research page.
More from Panorama: Investing in 2020
Asset Management services and solutions in your location
Please select your region
Important legal information
To proceed, please confirm that you are a professional / qualified / institutional client and investor.
Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© UBS 2021 The key symbol and UBS are among the registered and unregistered trademarks of UBS.
