The recovery from the 2008 global financial crisis is the longest in the economic annals, leading pundits to ponder whether 2020 can stay friend to the trend. Certainly there are threats to prosperity, from geopolitical tensions to trade tussles to the possibility that central banks have run out of ammo. With interest rates already negative in Europe and Japan, and low in the United States, the usual central bank fix for recessions, that of even lower interest rates, might lack effectiveness.
So, positioning a portfolio to weather a 2020 storm is a prudent course. Real assets, such as precious metals, property and commodities, have long been used to add ballast to investor holdings, as real assets often zig when financial markets zag. Real assets often have a low beta in relationship to stocks and bonds, meaning performance is not correlated to conventional financial assets.
Modern real asset investing includes exposure to metals, property, commodities and infrastructure. Certainly a historical favorite among real asset investors has been gold and other precious metals. Lately, gold bugs have been rewarded, with the yellow metal posting a strong 2019. But in 2020?
Gold started 2019 near $1,225 an ounce and traded close to $1,475 at year-end, a gain of more than 20 percent. In past epochs, one attraction of gold was its hedge value against cheapened paper currencies and inflation. That still holds true for many, although the world has been in a general disinflation since the 1980s, and actual deflation in some economies, such as Japan. Today, gold is gaining relative attractiveness as interest rates are so low, or even negative in much of Europe and Japan. Why pay interest on a Swiss banking account, as opposed to owning gold?
For some investors, buying gold is as simple as visiting a reputable coin dealer, though transaction costs must be considered, as well as safe storage.
As usual, Wall Street has afforded alternatives, such as owning stock in companies that safe-house gold, or gold mining outfits, or gold industry exchange-traded funds (ETFs).
Perhaps the easiest and safest way to buy gold is the industry’s largest ETF, SPDR Gold Shares, an owner of gold bullion, and which is up 23.7 percent year-over-year in late November 2019. A different tack is to own an ETF, such as VanEck Vectors Gold Miners ETF, that is invested in gold extracting companies. VanEck Vectors is up a hefty 49.5 percent in late November, year-over-year. In general, gold mining stocks amplify the swings of gold prices, up or down, something for gold bulls to ponder.
If there is a recession, gold deserves a place in the portfolio, says K.C. Conway of the Alabama Center for Real Estate at the University of Alabama, and also CCIM Institute chief economist. “Gold tends to outperform stocks and other investments during periods of economic contraction,” advises Conway. “Gold advanced at an annual rate of nearly 8 percent during the 2001 recession, and 11 percent during the 2007-2009 recession.”
If past is prologue, 2020 could be a golden opportunity.
To buy discrete real estate, the investor must be confident in knowledge of property idiosyncrasies, and also the local market and risks, and be able to tolerate a large dose of illiquidity. Many are successful in such endeavors, but for those who prefer liquidity and to effectively hire professional management, Wall Street offers real estate investment trusts. REITs generally own entire portfolios, limiting risks posed by a lone asset, and are professionally managed. Moreover, REITs can be sold in the click of a mouse, and may offer good dividends.
Within the REIT universe, the U.S. apartment sector appears well positioned to handle a possible economic downtown in 2020. Due to property zoning and other impediments, large swathes of the United States do not build enough housing, especially along the West Coast and in the New York, Boston, and Austin markets, among others.
There is a good selection of apartment REITs on Wall Street, including NexPoint Residential, BlueRock Residential and Essex Property Trust. The only caveat regarding apartment REITs is that many have appreciated solidly in the past few years, perhaps indicating the easy money is past. In contrast, BlueRock Residential has waffled in the past five years but has steadied of late, and has been posting rising revenues along with increasing coverage of a relatively large 5.27 percent dividend.
For value-hunting contrarians, an intriguing play is Front Yard Residential REIT. An oddball REIT, Front Yard buys single-family homes (nearly 15,000 so far) and missed Wall Street estimates during the most recent quarter. The salient feature about Front Yard is the stock trades at 45.4 percent below net asset value, but the REIT is breaking even on funds from operations. The short story is Front Yard has recently resolved legal issues and has quadrupled the size of its internally managed portfolio, resulting in serious digestion problems. But management said in its third-quarter conference call it is turning the corner on operating its large property portfolio. Worth noting, Front Yard has hired Deutsche Bank to look at options, which might mean a company sale.
Industrial warehouses have benefitted mightily from the economic expansion and growing delivery trade, added Conway of the CCIM Institute. Industrial REITs have soared in the past five years, though good dividend yields can still be had. For example, the $58.3 billion market-cap Prologis industrial REIT offers a 2.30 percent dividend, not bad in an era when a 10-year U.S. Treasury offers 1.80 percent. For yield hunters, Boston-based Stag Industrial, which emphasizes green-style management of single-tenant industrial properties, offers a 4.64 percent dividend.
RENEWABLES AND ENERGY
One might think of the renewable energy sector as an “alternative” industry, still second-string compared to fossil fuels. But renewable power generation, primarily wind, solar and hydro, will draw about $322 billion a year in investment through 2025, versus $118 billion annually fossil fuel power plants, Bloomberg recently reported.
The scale of the modern renewable industry is grasped in Australia’s northern territory, where in November financiers unveiled plans to build a 10-gigawatt solar power array covering more than 15,000 hectares of land, backed up by battery packs, to supply Singapore with power through a 3,800-kilometer submarine cable.
One broad-based play into renewable power is the $8.2 billion market-cap Brookfield Renewable Partners, which has a wide and growing portfolio of renewable power plants in North America, Brazil, China, Colombia, Europe and India. In addition, Brookfield Renewable shareholders get a 4.46 percent dividend, not bad in a world where some investors endure negative rates. The globe may enter a recession, but power companies generally collect their bills and reimburse investors, making Brookfield Renewable a safe and interesting, real asset play.
The long-term future of fossil fuels is debatable, but for better or worse, there appears little chance the world will be weaned off oil in most investors’ lifetimes. Global oil demand in 2020 will top 100 million barrels a day, up 17.6 percent from 10 years ago, forecasted the International Energy Agency. For those willing to invest in crude, there are some prospective strikes, including industry behemoth Exxon-
Mobil. Followed by a tribe of Wall Street analysts, as well as the credit rating agencies, there is a reduced chance of a sudden, negative shock on a stock like ExxonMobil. Like other oil majors, ExxonMobil is out of favor as the industry has been struggling against abundant global supplies. In general, oil prices have been soft since 2008, in part due to rising U.S. shale oil production.
Still, for 2020 the Wall Street consensus is ExxonMobil posts adjusted earnings per share of $3.87, up a hefty 79 percent year-over-year. ExxonMobil has been reinvesting in the business, building reserves, and in 2018 replaced 313 percent of production. In addition to a vast oil shale operation in the U.S. Permian Basin, ExxonMobil has reported a huge strike off the coast of Guyana with about 6 billion barrels of reserves, and still in the early stages of development.
The extended period of squishy crude prices in the last 10 years has some energy experts worried about a present day investment shortfall. In the past, such long periods of soft oil prices have led to less investment in the global oil patch, followed by supply constraints and higher crude prices — the classic bust-boom-bust cycle that is cliche in commodity markets.
Recently, the International Energy Agency reported its “analysis shows oil consumption growing in coming decades, due to rising petrochemicals, trucking and aviation demand.” But meeting the growth in demand would require a doubling of conventional oil development projects. “Without such a pick-up in [conventional] investment, U.S. shale production, which has already been expanding at record pace, would have to add more than 10 million barrels a day from today to 2025 [to keep global oil markets in balance],” says the agency. Expressed differently, the world needs the equivalent of adding another Russia to global supply in the next seven years, “which would be an historically unprecedented feat,” the energy agency explains.
In other words, in coming years the globe could again become short on oil.
But ExxonMobil has bucked the less-investment trend: “Contrary to most of its peers, ExxonMobil has substantially increased its capital investment to pursue growth opportunities along its entire integrated value chain,” reports Moody’s Investors Service.
In sum, ExxonMobil has been spending money to build out a future, in a world that may again feature tight oil supplies, and thus higher prices. Moreover, ExxonMobil pays a 5 percent dividend, a nice fillip for investors waiting for the global oil-screws to turn once again.
Investors can hope for yet another year of economic growth through 2020, but preparation and diversification is the best defense in case the globe turns to recession. Real assets have a track record of leavening the investor portfolio, perhaps offsetting losses on financial assets. Certainly, a case can be made for precious metals, selected property, certain commodities and infrastructure as part of a defensively positioned portfolio. Moreover, investors are still able to obtain solid dividends on relatively low-risk property, oil and infrastructure investments. Getting paid to wait out a 2020 recession, while ensconced in dividend-yielding real assets, may be the right option for many investors.
Benjamin Cole (firstname.lastname@example.org) is a freelance writer based in Thailand.