My dear Friends,

I don`t know about you, but all this talk about a stock market slump, a looming recession, rising inflation, interest rates going up and whatnot confuses me.

My stone-age instincts currently signal “freeze” rather than “flee”; believe me, my brain feels frozen. I guess I am not alone. At the moment, we prefer to duck down, skip the latest news, and wait until the worst is over.

Hmm! We have learned that staying calm is advisable and not making fear-driven decisions. But, doing nothing is not an option either!

Now, what? With the markets being so volatile, are there alternatives? Are real assets a good idea?

What are real assets?

Assets are generally divided into two categories- real and financial. The difference between the two is the real asset is usually physically owned by an investor or a business.

Similar to financial assets, real assets determine a business or individual’s creditworthiness and sustainability. Contrary to stocks, shares or bonds, the real asset is tangible. In more simple terms-you can touch it.

Real Estate	Land for building, forest, and arable land. Properties for residential and commercial purposes. Like family homes, apartments, offices, hotels, malls, storage units and warehouses.
Infrastructure	Systems and networks for transportation, storage and distribution of goods and services. Like roads, rail tracks, airports, sewer systems, powerlines, subways, pipelines, or waste disposal units
Commodities	Resources are used in commerce as a necessary input for producing another type of good. Like oil, gas, wheat, soybeans, metals ( gold, lithium, copper, diamonds)

The value

They share many similarities, including their valuation. In the case of the real asset, however, its value is tied to its ability to produce cash flows.

There is a close link between a real asset and its utility. Meaning an asset‘s ability to produce goods or services and there for cash flow. The asset’s utility will determine its value. In the case of natural resources, like gold, diamonds, oil, gas etc.-the value is determined by it being finite and in high demand.

The drawback

The major drawback of real assets is that they are less liquid than financial ones. Meaning that real assets can not easily be converted to cash. The marketplace has less volume and trading frequency.

Searching for the right buyer prepared to pay the desired price can be a hassle. Selling a house, for example, is far more time-consuming and laborious than selling shares (financial assets).

A real asset can be described as a tangible asset that possesses value due to being able to produce goods or services.

Financial assets trade hands daily, and the price reflected is updated in “real-time.

The growth rate of real assets is usually very slow. To some, depreciation and other expenses may make real assets less attractive in the long term.

In contrast, financial assets claim an unlimited growth potential. However, they are usually riskier than real assets.

Inelastic demand

Real assets are often utilised for portfolio diversification, especially considering their demand tends to be inelastic.

Houses, for example, are necessary as consumers will always need a home for shelter, to sleep in, etc.

As another example, farmland is used for agriculture and the production of crops. This is essential to human life, as we need food to survive.

Inflation hedging

One much-heralded feature of real assets is that they are not correlated with the stock market. This was not the case all the time, but over long timeframes, this has been true for most of recent history.

Historically, real assets have fared better than other asset classes during periods of inflation and during economic downturns.

All real assets carry an intrinsic value. While the value of the financial assets has a relation to the underlying asset. The underlying asset may be tangible(real asset) or intangible (idea)

Even if the valuation of real assets were to drop, the widespread view is that real assets are substantially more likely to recover once the economy normalizes.

Of course, the value of real assets can fluctuate substantially during recessions. However, a certain amount of value remains tied to the asset at all times.

During periods of good economic growth, real assets tend to follow the overall trend and rise in value. Real assets usually mitigate any losses during recessionary periods during expansionary cycles.

Bullish real assets

Prices across many real assets have already moved up significantly since 2021.

The question is, will real asset prices continue to rise? Or is there a possibility that most of the upside is already priced in?

It is important to know that real assets have a bonus. They typically perform well in an environment with rising interest rates like the one we have.

This is in stark contrast with stocks; they tend to fall when interest rates go up. So, important factor needs to be included in any analysis and decision-making. 

According to analysts, there is plenty of room for more price hikes. Why? Because demand in developed economies will remain high. And geopolitical conflicts, disrupted supply chains and climate change will further worsen supply.

It will take considerable time until disrupted supply chains are back to normal, de-globalisation will not happen in the foreseeable future, and climate change will create some new real assets to invest in.

In the foreseeable future, real asset prices will continue their upward trajectory.

While balanced portfolios have had a tough time digesting the surge in bond yields, commodities remain a welcome source of diversification in multi-asset portfolios amid low correlations and stable risk-adjusted returns.

Sabine Schels, Mikhail Sprogis, Goldman Sachs

The commodity attraction

Because commodity prices are driven by supply and demand, they react strongly to disruptions like conflict, the weather, and other economic disruptions.

Conflicts and climate issues are here to stay. So, markets will continue to experience pressure and commodity prices will rise further.

So, resources become more valuable when supply is disrupted, and demand remains consistent. Crude oil, natural gas and base metals have already reached new all-time highs.

Oil prices are up by 44% this year, and gas prices in Europe have risen 165%. Wheat prices almost doubled and are forecast to rise another 40% this year, not only due to the war in Ukraine but because fertilizer is in short supply and harvests in other regions are in danger.

Raw materials are in short supply and inventories are depleted. Commodity stocks allow investors to capitalize on costs that can be passed to consumers.

Non-energy prices, including agriculture and metals, are projected to increase almost 20 percent in 2022 and will also moderate in the following years. Nevertheless, commodity prices are expected to remain well above the most recent five-year average

World Bank

Worth investigating

Before we go on, here is some warning. Hyped real assets like handbags or jewellery should not play a serious part in your overall portfolio planning or any long-term financial strategy. Buy these items for fun, but not as investments.

Others discovered investing in wine. Wine clearly outperformed the Global Equity Index by 1,88% annually over the last 15 years. But I suggest you rather drink the wine and refrain from making wine part of a financial strategy.

Finally, a word about art investments. Art can be an excellent investment but be absolutely clear. Firstly, art generally is a (very) long-term investment. Second, you will need a professional curator unless you are an art historian or art dealer yourself. The art market is a shark tank, so be careful before you write that cheque.

For more serious portfolio strategies investigate:

How to invest

The most obvious choice would be your wealth manager or your broker. But be warned, some flat-out refuse to even look into the topic. To their excuse, commodities are a different matter than stocks and shares, and specialists are far better suited to deal with this market.

However, you have every right to demand that your wealth manager or financial adviser take a look deeper into that matter or find someone knowledgeable in that field.

Alternative routes are

But make sure you obtain all the necessary information to make an informed decision before investing.

Commodity takeaway

So, do remember, that the commodity market is driven by supply and demand. Demand will not change drastically anytime soon, so commodities will continue to run hot. They remain in global short supply. In fact, it could take years to get the production abilities to fill the supply gap. As a result, the availability of commodities is expected to remain tight.

With this in mind, analysts expect most commodity prices to be significantly higher in 2022 than in 2021 and to remain high in the medium term.