ATOP a new decade and amid a long market cycle, we take a moment to assess the outlook. What are the key macroeconomic forces at work? How will real asset markets play out in the year ahead? What are the big themes and key opportunities in the Asia-Pacific?
In setting the scene, we see macroeconomic drivers remaining supportive for real assets. Demand growth – with marked local variations – is holding up relatively well, given lower interest rates, a structural shift to yielding assets, abundant capital for deployment and early signs of diminishing trade tensions, notwithstanding a manufacturing slowdown, ongoing geopolitical tensions and a virus emergence.
For the Asia-Pacific, there remains a broad and compelling growth story that will persist for some years, supported by firmer demographic trends, rising incomes and wealth, and deepening capital markets and investor appetite.
The key themes for 2020 include: real asset markets are cycling slowly, still relatively attractive and relentlessly changing with the future.
The long cycle is still intact, albeit with moderate global growth and considerable local differences. Low interest rates and abundant capital are still supportive for the investment outlook. Market cycles are quite divergent and constantly evolving, with resilient US market conditions, some moderation in Europe and a slowing in China given trade disruptions and virus emergence.
For investors, this variability within a long cycle provide considerable scope for active market selection and diversification gains across a globalised portfolio. The sector remains relatively attractive, with risk-adjusted returns that compares well to other asset classes, especially in a world with moderating returns expectations.
Indeed, the scope for consistent yield is compelling give low-yielding bonds. This is prompting a continuing portfolio reallocation to both infrastructure and real estate. Moreover, lower interest rates are still supporting tight cap rates, although investors should prudently target segments with firm income growth prospects, either from contracted revenue gains or well-occupied, under-supplied real estate markets.
Relentless structural change continues to be crucial drivers of long-term demand and profitability. In real assets, our investment horizon is somewhat longer by necessity. Consequently, we focus keenly on the impacts of demographic change, supply-side growth, technological change and, increasingly, climate risk.
In this context, the market drivers are both global and local … and investors need to tailor their strategies accordingly.
For infrastructure, the energy transition – from carbon-intensive to renewable sources – remains the dominant theme driving asset allocation and deal flow.
In Asia, underlying energy demand remains robust, with investment opportunities broadening out of core markets like Australia and Japan as regulatory frameworks improve. In the US, there is a prominent remaking of the energy sector in progress, where a concerted push into LNG will underpin transport and processing infrastructure, while the renewables and power storage segments are maturing rapidly. In Europe, the push into renewables continues at a robust pace, enabled by a more supportive political framework and EU emission targets.
For real estate, abundant yield-seeking capital continue to support deal volumes, even as tighter pricing and geopolitical tensions prompt greater caution in some markets.
In Asia, there is a differentiated outlook given firm overall growth, but sharp disruptions in Hong Kong and China, from trade barriers and the virus emergence, are providing emerging value. In the US, the e-commerce shift is still changing asset allocation and driving market returns, in favour of logistics and at the expense of traditional retail. In Europe, there is slightly more clarity for investors post-Brexit, as focus turns to sectors with supportive tailwinds, including build-to-core, logistics and student accommodation.
As real estate markets are somewhat more comparable, we assess the outlook based on return and risk expectations across 50 cities and four sub-sectors over the next five years. Opportunities could be found in Boston, Berlin and Sydney as key office targets; New York, Los Angeles and Sydney as priority picks for industrial; and Austin, Seattle and Stockholm as points of focus for retail.
All told, investing well is always an achievable challenge and 2020 is set to be no different. And while it is common to focus on the news headlines – on trade, politics or viruses – the key drivers of long-term value and returns are predominantly structural.
In this context, our investment course for 2020 is well set, with a clear focus on cyclical drivers, relative value and deep structural drivers of real asset demand.
Bruce Wan is BlackRock’s head of Asia Real Assets Research
