Late cycle rebound
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Reviewing real asset demand and income growth expectations
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.
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.
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.
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.
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