2022 Outlook – Real Assets

The need for yield and total return is increasing in today’s low interest rate environment. As a result, some investors see real assets as a source of steadily growing, reliable, inflation-protected income that doesn’t sacrifice long-term total return. CI Global Real Asset Private Pool, for example, provides exposure to real estate and infrastructure assets that form increasing weights in institutional portfolios. 

With many markets exhibiting all-time highs, we want to highlight that despite the necessity of these asset classes in the global economy, recent returns have been muted. Since the beginning of 2020:

• Broader stock indexes are up from approximately 30% (S&P 500 Index and S&P/TSX Composite Index) to 70% (Nasdaq Composite Index)  
• Real estate (FTSE EPRA NAREIT Developed Index) is up only 13.6%
• Infrastructure (S&P Global Infrastructure Index) is down almost 4%, restrained by the transportation sub-sector.

For an investor with an appropriate long-term horizon, this short-term dislocation offers an attractive entry point.

Source: Bloomberg Finance L.P. As of December 10, 2021, using daily returns in local currency.

Real estate

As was the case in 2021, strong earnings should be a catalyst for real estate in 2022. The ongoing economic recovery will be supportive of all real estate sub-sectors, from apartments, to industrial, retail, and even the harder hit office sector. From the beginning of 2022, companies in these sub-sectors will produce stronger comparables relative to 2021, leading to impressive earnings and cash flow growth. Combined with payout ratios that are at the low end of historical levels, this should lead to dividend increases across the real estate market and be supportive for stock prices. 

Given recent data, investors are rightly concerned about inflation as we head into 2022. Real estate can actually be a beneficiary in an inflationary environment. Costs are rising for everything from land, to labour, and building materials, making new construction more expensive. This limits supply and makes existing buildings extra valuable as replacement costs rise. Also, several real estate sub-sectors have leases with annual rental escalations tied to the inflation rate or have short duration leases, such as hotels and apartments, that can quickly adjust rents in an inflationary environment. 

Another reason to expect a good year for real estate in 2022 is simply the amount of capital looking to acquire real estate assets. Compelling yields, predictability of cash flows and solid growth prospects are driving allocations from pension funds, institutional investors and private equity. 2021 was a very active year in terms of acquisitions across many sub-sectors and that trend should continue in 2022.

As we enter 2022, the global economy faces some unique challenges, from current high levels of COVID-19 infections to inflation highs and a likely interest rate tightening cycle from central banks. Despite these obstacles, real estate is well positioned to continue to perform, with solid property fundamentals, a strong growth outlook and robust investor demand.

Infrastructure

After overcoming twin headwinds of ongoing lockdowns and rising interest rates in 2021, infrastructure is positioned for a strong 2022 as long-term fundamental drivers of value reassert themselves. 

For income-oriented investors

Despite a number of infrastructure sub-sectors (airports, toll roads, energy) having reduced dividends in 2021, dividends are projected to resume growing in 2022 (13%¹ projected), well-funded by cash flows. With government bonds yielding less than 1%² and inflation at recent highs, fixed-income investors switching to infrastructure’s higher yields and inflation-protected revenues should support returns. This should also spur private investor acquisitions of public assets, similar to real estate.

For value investors

Midstream energy/pipelines represent one of the few industries trading below historic valuations. Although energy transition (a key exposure for the fund) continues, pipelines and related companies are efficiently transporting energy sources globally and should spin off healthy cash flows for years to come.

For growth investors

Green energy and data infrastructure offer long-term opportunities and transportation offers growth through a post-pandemic rebound. Utilities embracing green energy will increase investments, cash flows and dividends as governments encourage decarbonization. Data centres and cell towers processing ever-growing data consumption will also see strong increases in cash flows. While airports and toll roads were hit hard by pandemic restrictions, many highways have seen traffic return to pre-pandemic levels and we believe the recovery in air travel is a question of “if,” rather than “when.”

In all, we feel exceptionally confident in the outlook for real assets given:

• The attractive valuations
• Growing interest for income and stability from private and public investors
• The need for solutions that take into consideration a variety of investment factors in an inflationary environment.

¹Source: Bloomberg Finance L.P. as of December 10, 2021.

²Source: Bloomberg Finance L.P. Yield is the yield to maturity for JPM Global Government Bond Index as of December 10, 2021.

IMPORTANT DISCLAIMERS

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

CI Global Asset Management is a registered business name of CI Investments Inc.

©CI Investments Inc. 2022. All rights reserved.

Published January 18, 2022