Navigating the 2024 Investment Landscape: The Strategic Role of Real Assets

While U.S. stock markets have recently hit all-time highs, global events like Japan's unexpected rate hike serve as reminders of the inherent unpredictability in markets. In the U.S., the Federal Reserve’s recent rate cut has sparked fresh concerns about bond yields and overall market stability.

As we enter the final quarter of the year, many investors are refining their strategies to enhance stability.

Global Market Volatility: Economic Shocks and Geopolitical Tensions

The global economy experienced a sharp decline on August 5, 2024, as markets worldwide reacted to an unexpected rate hike by the Bank of Japan. The central bank's decision to raise rates to 0.25% caused a significant appreciation of the yen, surprising many investors, particularly those involved in the yen carry trade^[1]. As borrowing costs in Japan rose, traders adjusted their positions^[2], causing ripple effects across various asset classes, including forex and commodities.

In the aftermath, Japan's Nikkei 225 fell by over 12%^[3], marking one of its steepest drop in years. The South Korean KOSPI Index followed suit, dropping nearly 9%, which triggered a temporary trading halt due to heightened volatility. U.S. markets were also affected; by mid-September, the Dow Jones Industrial Average had declined by 2.6%, while the S&P 500 and Nasdaq saw drops of around 3%^[3:1]. It was a particularly challenging week for the Nasdaq, finishing more than 13% below its summer high^[3:2]. Additionally, the VIX, often referred to as Wall Street's "fear gauge," surged past 65^[3:3], reflecting growing investor anxiety.

Global conflicts have further compounded the economic uncertainty, adding complexity^[4] to the 2024 investment landscape. Ongoing tensions, such as the Russia-Ukraine conflict and renewed hostilities in the Middle East, have already disrupted global oil and gas supplies, fueling market volatility and driving inflationary pressures. These disruptions are impacting^[5] already fragile supply chains, particularly in energy-dependent sectors like oil and gas, with ripple effects extending into industries such as technology and manufacturing. Geopolitical risks tend to heighten volatility in U.S. markets, especially in sensitive industries impacted by supply chain disruptions and broader investor sentiment.

U.S. Uncertainty: Potential Volatility Ahead

While the U.S. economy remains resilient, with unemployment falling to 4.2%^[6] and inflation easing to 2.5%^[7] range, external pressures could still drive instability.

The Federal Reserve’s recent rate cut, its first since March 2020, added a layer of complexity. After entering July just under 4.5%^[8], the 10-year Treasury yield briefly dipped to 3.6% prior to the rate cut, only to pop back up to 3.8%^[9] as of the end of September. This volatility underscores the bond market’s sensitivity to broader economic trends and ongoing concerns about growth and monetary policy adjustments, making fixed-income yields an increasingly complex space for investors to navigate.

While the Fed has steered the economy toward a "soft landing" following cycles of quantitative easing and tightening, the long-term effects of the unprecedented fiscal stimulus deployed during the pandemic remains uncertain. As of May 2024, the Fed has been reducing its balance sheet by up to $60 billion per month^[10]—down from $95 billion earlier in the year—yet questions persist about how long these pressures will last.

Adding to this complexity, the upcoming 2024 U.S. election is expected^[11] to heighten market volatility. Depending on the election outcome, sectors like energy, healthcare, and financial services may face significant impacts, with potential changes to corporate tax rates and trade policies expected^[12] to drive market movements. As the year progresses, investors are closely monitoring the investment landscape, shaped by evolving economic policies and political uncertainty.

Real Asset Performance: Building Diversification and Stability

Even with record-high stock prices, fluctuations in bond markets, changing monetary policies, and ongoing geopolitical tensions underscore the importance of diversification in pursuing long-term stability.

Against this backdrop, real assets present a compelling option for those seeking to help strengthen portfolios and achieve long-term resilience. Anchored by robust economic fundamentals and sustained long-term demand, real assets hold intrinsic value and tend to be less correlated with traditional financial markets. This unique combination helps shield these assets from short-term volatility, positioning them as a stable and complementary asset class that enhances portfolio resilience amidst broader market fluctuations.

Let’s take a closer look at how several real assets have performed over both the long and short term:

Real Estate:

Over the past 30 years, commercial real estate has averaged an annualized return of 7.84%^[13], offering investors both short-term returns through rental income and long-term gains through property appreciation. Key drivers, such as economic growth, population expansion and urbanization, continue to drive property values; from 2014 to 2024, the U.S. housing market grew at an annualized rate of 5.5%^[14] while the Vanguard Real Estate Index returning 12.42%^[14:1]. While rising interest rates and low inventory have caused a temporary market leveling off, many experts forecast stabilization^[15] by late 2024, supported by easing inflation and more favorable monetary policies. Real Estate Investment Trusts (REITs) have also performed strongly, delivering 9.21% annual returns^[16] over a 30-year timeframe, although they tend to be more volatile than direct real estate investments due to their liquidity and exposure to broader equity market fluctuations.

Infrastructure:

Investing in physical infrastructure can provide a combination of stability and growth potential over time. The Dow Jones Brookfield Global Infrastructure Index, which takes a pure-play approach, has demonstrated a strong risk/return profile compared to broader indices; over the past 15 years, this index has provided an annualized return of 6.77%^[17]. Though infrastructure deals experienced a 21% decline^[18] in 2023, opportunities in the sector remain abundant, particularly given the estimated $15 trillion^[19] global infrastructure investment gap. This demand spans critical sectors like renewable energy, transportation, and digital infrastructure, reinforcing infrastructure’s potential as a long-term growth asset while providing some insulation from broader market shocks.

Farmland:

Farmland has historically demonstrated resilience as an asset class, delivering consistently strong returns. Between 1992 and 2023, the NCREIF Farmland Index achieved an average total annual return of nearly 11%^[20], driven by both income generation and land appreciation, with a standard deviation of about 6%. This relatively low volatility compared to traditional investments is largely due to farmland's critical role in the global food supply chain and the steady demand for agricultural products. Farmland has historically exhibited low correlation with traditional asset classes and broader market indices, largely because the demand for agricultural products remains relatively stable, rendering farmland investments less vulnerable to economic downturns^[20:1]. Additionally, farmland has the potential for long-term appreciation, driven by factors such as population growth and urbanization. The sector's resilience has been particularly evident since 2020; U.S. cropland values have risen steadily over the last four years, reaching $5,570 per acre in 2023^[21]. This strong performance has attracted institutional investment, which has surged from $2.2 billion in 2010 to $16 billion by 2024^[20:2].

Timber:

Timberland has similarly shown strong long-term performance, with the NCREIF Timberland Index reporting a 8.72%^[22] annualized return from 1992 to 2023. While timber prices have experienced short-term volatility—particularly during the 2020-2021 pandemic-related price surge^[23]—investments in the sector have remained stable; timber investments posted a 9.45% annual return in 2023^[22:1].

Evaluating Real Assets Amid Current Market Conditions

Integrating real assets into your portfolio can be an effective strategy for enhancing diversification and managing risk in the face of increased uncertainty. However, investing in real assets comes with its own set of complexities, including market dynamics and regulatory challenges, necessitating specialized knowledge to identify and manage high-quality opportunities. To effectively address these challenges, collaborating with experienced investment managers can be crucial.

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