2024 Real Assets Outlook

As inflation has moderated and interest rates have stabilized, the market has been eager for the Fed to pivot towards a looser monetary policy. Asset prices are broadly rich, pricing in an economic soft landing and a couple rate cuts by year-end. The Fed has a challenging dance ahead where it needs to hold rates steady enough to keep inflation closer to its 2% target, but not so long as to choke off economic growth. While we are broadly less bearish this year across real assets, especially in real estate, given more positive signs of a soft landing, rich asset valuations temper our enthusiasm.   

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The Real Assets Outlook includes insights around the following trends:

2024 is set up to be a compelling vintage for real estate: Real estate valuations have been adjusting downward to reflect the new interest rate environment, but at a slow pace. Fundamental challenges remain in the office sector, as well as oversupply in some markets; however, we believe the investment environment for new capital should be more favorable.  Assets in need of refinancing may need to be sold at lower valuations with tighter credit standards, which will create buying opportunities. We expect more pain in 2024 but believe we are much closer to the bottom than where we sat one year ago.

Private infrastructure was up modestly in 2023…what lies ahead?: Anticipated valuation write-downs in infrastructure failed to materialize last year. The transaction market slowed across infrastructure but was generally healthier than other private market segments, in part due to the availability of debt financing, high levels of dry powder, and strong industry fundamentals. We struggle with the value proposition of core infrastructure when debt returns offer a similar expected return. We would prefer to invest in non-core infrastructure with fresh capital rather than buying into core funds where expected returns look muted.

What is next for oil & gas after a strong year for M&A?: In 2023 and continuing into 2024, we have seen a material uptick in public company and sponsor-backed M&A across the oil & gas industry. Liquidity has been a challenge for private energy funds for years, and remains a challenge, but there have been notable transactions recently which have encouraged us to raise our outlook in the asset class. The opportunity within upstream oil & gas looks better than it has in years, though there are significant risk factors, which we discuss.

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