Playing to the conditions
The current economic outlook is unusual, characterised in Australia and elsewhere by subdued economic growth, elevated inflation and rising interest rates. These conditions will have differentiated impacts on returns across different asset classes.
Staying on the course
Specifically, subdued economic growth weakens demand, while high inflation erodes purchasing power and investor returns. Perhaps the sharpest impacts relate to higher interest rates, which diminishes returns across multiple equity asset classes.
Focus on performance
In recent years, we have seen abrupt cyclical downturns across nearly all asset classes, partly reflecting the regular ups and downs in growth, inflation and rates. Amid all this, real estate credit has delivered steady returns, across the economic cycle.
Focus on resilience
More broadly, portfolio diversification is getting harder to find. A simple stocks-and-bonds portfolio no longer deliver balanced returns across the cycle. Greater exposures to less cyclical investment strategies can diversify portfolios and boost resilience.
Navigating the market
Certainly, there are challenges in the real estate sector, with falling housing prices and notable developer failures. That said, the commercial real estate credit sector – particularly with the right asset manager – is still very resilient, despite these conditions.
Manager selection matters
Long-established credit managers have seen these market cycles before. Prior experience matters greatly. Conservative real estate lenders with strong diversification and single sponsor exposure limits are still well-placed to deliver consistent returns.
