Investors looking to offset the impact of low economic growth and high inflation should consider a diversified portfolio based on investments in real-world assets rather than themes or trends, according to an Australian boutique investment manager.
Datt Capital chief investment officer Emanuel Datt said during adverse market conditions it was sensible to return to fundamentals and “one of the best things investors can do is to put more onus on tangible, hard assets versus the recent popularity – and erstwhile success – on investing in abstractions”.
He added in the current market conditions factors such as positive cash flow, positive real returns, relatively low valuation multiples, returns to shareholders via capital initiatives and strong market leadership positions should be seen in a good light.
Datt pointed out looking at which asset classes may be the most resilient during the current investment cycle could be answered by reflecting on past historical periods with similar conditions as the present day.
“The stagflationary environment in the 1970s is a reasonable comparison in some ways to the present day, with numerous ‘oil shocks’ experienced analogous with the global ‘energy molecule’ crisis being experienced today,” he explained.
“The sector that experienced the best returns over this decade was the energy sector, with the worst returns coming from the technology sector.
“Value and small-cap assets performed best throughout the decade, with growth assets and government bonds providing the worst relative returns.”
Based on this, he revealed his firm believed the most favoured sectors in the immediate to short-term are energy, agriculture and tangible goods and commodity producers.
Datt acknowledged energy investments were unpopular and cheap due to environmental, social and governance mandates, but had leverage to higher energy prices going forward, agriculture investments were a defensive, real asset class, but typically had lower returns, and tangible goods and commodity producers will benefit from the trend towards greater localisation.
“It is important to observe that recent inflation has been driven by shortages and supply chain disruptions. Rising rates are unlikely to control inflation in the short term,” he said.
Also it is unlikely passive market exposure would provide investments that outperform the rate of inflation, but appropriate actively managed funds, in combination with other uncorrelated assets, would provide a higher probability of an investor’s wealth in real terms, he suggested.
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