According to the paper, entitled Real Assets – The New Mainstream, global deleveraging will suppress economic growth and interest rates, impacting the returns on equities and bonds. It predicts that The Dow Jones Index will deliver total returns averaging just 4% per annum over the next 10 years, for example, based on its current Shiller Price/Earnings Ratio and 114 years of data, while German 10-year government bonds are set to deliver negative real returns even if interest rates were to reach 4% by 2024.
Oldrik Verloop, Co-Head of Hydropower at Aquila Capital, says: “This unique investment landscape, for which there is no precedent in history, is giving rise to considerable challenges for pension fund managers struggling to fund deficits. Among these challenges is the need to assess the impact of today’s loose monetary policies on global interest rates and inflation tomorrow.
“The quest for new investment solutions by institutional investors seeking to future-proof their portfolios will spark a prominent allocation shift towards real assets, which will become an indispensable necessity in a diversified portfolio.
“Real assets are uniquely positioned to provide value and enhance overall risk-adjusted returns in a broad range of market environments. The powerful combination of market-independent stability and growth make them an attractive core holding for institutional investors. They are supported by long-term macroeconomic trends and can deliver a strong, inflation-protected income with high investment security, manageable risk and a limited correlation with traditional investment asset classes of equities and fixed income.”
The paper anticipates extensive opportunities for investments in real assets because economic growth accompanying population expansion will fuel demand for commodities – a transformation that will also be highly energy intensive. With concerns over global warming and ever increasing global demand for electricity this also signals further growth in regenerative energy sources. Investments will also be needed in farmland to provide the 60% rise in calorific output that will be needed over the next 40 years to feed a population set to rise to nearly 10 billion by 2050 1. This translates to a huge demand in investment requirements, beyond the reach of public financing alone, which will create a significant opportunity for the investment of private capital.
Research 2 by Aquila Capital found that around 60% of institutional investors in Europe expect institutional allocations to real assets to increase over the next three years and more than four times as many were positive on the investment outlook for real assets (41%) versus those who were negative (10%).
Sources:
1 UN Department of Economic and Social Affairs
2 Research carried out among more than 50 institutional investors across Europe