October 19, 2016 | 12:45 | Dubai
A research report by Bank of America Merrill Lynch’s Global Investment Strategy provides a performance comparison of real assets (commodities, real estate etc.) and financial assets (Stocks, bonds etc.). Below are the key points why real assets may have an edge:
- Buy Humiliation, Sell Hubris: price relative of real assets (real estate, commodities, collectibles) to financial assets (stocks & bonds) at its lowest level since 1926; US stocks close to all-time highs versus US house prices; US bonds at all-time highs versus diamonds; 10-year rolling return from commodities lowest since 1933.
- Peak Deflation: real assets positively correlated with inflation; stocks & bonds negatively correlated with inflation; central banks are withdrawing stimulus as deflation fears subside; real assets hedge against inflation & monetary tightening; real asset relative performance has 82% correlation to Fed funds rate since 1950.
- War on Inequality: commodities, real estate & infrastructure are natural beneficiaries of a “War on Inequality” waged via fiscal stimulus.
- Cheap Value: real estate & infrastructure are higher yielding assets than global stocks & bonds.
- Positioning: Asset allocation to real assets is low but on the rise (just 8.2% of total ETF market cap is exposed to real assets; pension fund up from 9% to 24% past 15 years).