For the first time in decades, high inflation has emerged and is creating challenges for consumers and investors. We believe inflation will likely begin falling later in 2022, though notable inflationary and deflationary forces are in play, and it is difficult to gauge which of these forces will have greater impacts. While inflation remains the topic most discussed in the media, and among many investors, how the Fed responds and whether the tightening path overcorrects is an issue we are discussing more today. Learning from history and the actions of the Volker Fed, we would not rule out the possibility that this inflation cycle quickly turns into deflation as recessionary forces take hold.
The Verus 2022 Real Assets Outlook includes insights around the following trends:
- Push towards sustainability: The global effort to reduce carbon emissions will perhaps affect real assets more than any other asset class. Power generation, transportation, food production, and the supply of various commodities will need to undergo significant evolution in order to reach targets set by governments across the world. This will require massive funding over the next several decades, to the tune of at least $92 trillion, according to the Bloomberg 2021 New Energy Outlook, creating opportunities for new investment as well as challenges for existing assets that will be made obsolete.
- Challenges investing in oil/gas assets: Higher commodity prices are breathing life into a still unloved sector and producers are making record profits in 2022. That said, there is still too much uncertainty around oil/gas demand, access to capital, and geopolitics for us to gain comfort in the long-term outlook for the oil/gas industry. For investors that can look past the ESG issues associated with the industry, we would consider public market investment opportunities in E&P over an illiquid private fund investment.
- Navigating the strong recovery in real estate: Fundamentals in real estate have continued to recover broadly, seeing record low vacancy levels, strong NOI growth and transaction volumes returned to near peak levels. Property type dispersion has been incredibly high as “beds and sheds” (a.k.a. industrial and multifamily) assets have driven recent index performance. We believe that the trends accelerated through the pandemic of e-commerce adoption rates and flexible office usage will continue to create challenges in the retail and office sectors. We continue to support portfolio diversification through increased exposures to alternative property types and remain favorable on the long-term fundamentals for the industrial sector.
We look forward to discussing this research with you.