Sat. Oct 16th, 2021

Investors concerned about keeping up with rising cost of living may want to consider exposure to real estate and infrastructure, which they have historically outperformed in an inflationary environment, according to a BlackRock report.

The asset management giant looked at average annual returns on different growth and inflation regimes over the past 20 years, and found that U.S. and global real estate, as well as global infrastructure, outperform stocks and bonds when inflation is high. The report shows that an improvement was observed in periods of low and high growth.

American real estate was the one that got the best return when growth and inflation are high.

BLACKROCK CITING: Bloomberg, Barclays (Investment Grade: US Agg Bond; Government Bonds: US Gov’t Agg TR), NCREIF (US Real Estate: NPI), MSCI (Global Real Estate); EDHEC (Infrastructure: All own resources) and S&P (Shares: S&P 500); at 31 December 2020 (annual data since 2001).

And global infrastructure wins when inflation is high but growth is low, according to another chart in the BlackRock report.

Steven Cornet, head of America’s real estate research and strategy group BlackRock and co-author of the report, told MarketWatch on Thursday in an interview that private and public betting on real estate and infrastructure exceeds the ratio of high inflation. But the report’s graphs reflect how private real estate gains and infrastructure assets compare to stocks and bonds, he said.

These real assets tend to improve in part because “leases and revenue streams are directly or indirectly linked to inflation,” Cornet said. “Overtime, cash flows keep pace with inflation.”

Take a look at: Prices for office buildings fall in the heart of major American cities

Within real estate, the graphs show the yields of private betting on commercial properties, including areas such as multifamily, office, retail and industrial, Cornet explained in the interview. Inflation and economic growth were considered high when they exceeded 2.5%, he wrote in the report, co-writing with Yasmine Kamaruddin, a member of America’s real active team.

“It’s hard to predict inflation,” Cornet said. “I don’t envy the Fed.”

BlackRock expects inflation to rise in the medium term to exceed the Federal Reserve’s average target of 2%, following record levels of monetary and fiscal stimulus that support the economic reopening of the pandemic, according to the report.

The firm predicts inflation of nearly 3% in five years, which is “above current equilibrium indices, but well below the hyperinflation levels of the 1970s,” the authors wrote.

Read: The Fed worries that the delta variant could prolong shortages and keep inflation high until 2022

“We believe real inflation-adjusted returns will remain negative,” Cornet told MarketWatch, referring to U.S. treasuries. If the ten-year Treasury yield remained below 2.5%, he said, “many other asset classes still look attractive.”

The yield on the 10-year Treasury bond TMUBMUSD10Y,
1.348%
it remained unchanged on Thursday, with 1.342%, and has traded below the 52-week high of 1.749% on March 31, according to Dow Jones market data. Bond yields increase when prices fall.

“They’re just low yields everywhere,” Cornet said. But the returns on infrastructure and real estate assets are higher and, in the context of inflation, are “a fairly attractive area for real assets.”

Meanwhile, US stocks closed lower on Thursday, with the S&P 500 SPX,
-0.58%
and Nasdaq Composite COMP,
-0.64%
indices are down 0.6% each and the Dow Jones industrial average is down 0.5%, according to FactSet data. But the real estate sector SP500.60,
+ 0.10%
of the S&P 500 data gained 0.1%.

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