Despite headwinds such as geopolitical uncertainty — driven, in large part, by escalating tensions over trade policies — equity real asset classes posted positive results and outperformed broader global equity markets, according to Brookfield’s second quarter 2018 real assets performance report. Real asset debt declined with the overall fixed-income market and outperformed more broad-based fixed-income indexes.

Economic growth remained positive across developed markets, with the United States leading global growth trends by a wide margin. Inflation moved above the Federal Reserve target of 2 percent year-over-year growth domestically. The country is also ahead of the game in normalizing interest rates, with two rate hikes to date in 2018 and two more anticipated later this year.

Brookfield expects global economic growth to improve modestly in the coming months, albeit interrupted by periods of heightened uncertainty relating to interest rates, inflation and trade-policy tensions. The current backdrop of moderate global growth — with interest rates and inflation still below historical norms — is a positive environment for investing in real assets.

GLOBAL REAL ESTATE

Real estate performed well globally during the second quarter, more than erasing the –4.3 percent declines of the first quarter. Concerns over the impact of rising interest rates, largely blamed for the sell-off, have given way to more positive sentiment on solid fundamentals, the strength of the U.S. economy and generally favorable global growth trends.

U.S. REITs traded at a narrow discount to net asset value in the second quarter, but valuations varied considerably by sector. One standout cited by the report is industrial real estate, which has been one of the strongest-performing property types for years, driven in large part by the healthy growth of e-commerce. While fundamental trends are still positive, valuations appear stretched. So far, demand continues to outpace new supply; however, demand will begin to wane as the sector matures, and vacancy will rise with completion of new warehouses.

Some global real estate markets are trading at meaningful discounts. From a valuation perspective, on average global real estate securities continue to trade in line with long-term historical valuations but with meaningful discounts in some regional markets. From a regional perspective, the United Kingdom appears more attractive than continental Europe, based on depressed prices in the aftermath of the Brexit vote. In Asia, there are concerns China’s tightening of capital controls may continue, and more-restrictive housing and credit policies will put downward pressure on stocks in the region.

The second quarter’s reversal in sentiment toward global REITs was cited as “encouraging” by the report. As the real estate market moves into the latter half of the year, some investors are seeking companies that provide exposure to outsized growth at a reasonable price and those representing attractive value opportunities. Wide variations in valuation exist between companies and sectors, which presents attractive opportunities for active managers. Brookfield suggests it is prudent to pay close attention to valuations in this market. Companies most at risk for decline are likely to be those trading at sizable premiums to net asset value or that have high levels of debt.

This story was excerpted from the 2Q 2018 Real Assets Quarterly, produced by the Brookfield Public Securities Group.