Investment ideas for a rising-interest-rate environment: ‘real assets’

After a decade of rock-bottom interest rates, it’s clear that the trajectory for interest rates is now up. Interest rates were increased both in the UK and the US last year, and if economists’ forecasts are accurate, we’re likely to see further interest rate hikes this year.

Rising interest rates will have a number of implications for UK investors, as interest rates affect almost every asset class. For example, one asset class that can underperform in a rising-interest-rate environment is fixed income. This is due to the fact that bond prices have an inverse relationship to interest rate movements. Dividend stocks can also come under pressure as rates rise, as yields on risk-free government bonds become more attractive to investors. Consequently, rising rates could make wealth management and retirement planning more challenging in the near term. So, what are the best investments to own in a rising-interest-rate environment then?

Real assets: protection against rising rates

One asset class that our team of wealth advisors believes offers significant appeal in the current financial environment is the group of assets known as ‘real assets.’ These are physical assets such as real estate, infrastructure and commodities.

The reason that real assets are well suited to a rising-interest-rate environment is that their performance, generally speaking, is connected to macroeconomic drivers and global economic growth trends. Often, the cash flows of the underlying assets rise as inflation increases, and as a result, these assets can outperform other asset classes when inflation is picking up and interest rates are moving higher. 

Another reason we see considerable appeal in real assets right now is that end-user demand for the services that real assets provide is usually quite constant, meaning that cash flows can remain stable during economic downturns. The asset class also tends to have a low correlation to more traditional asset classes such as equities, fixed income, and residential property, which means it can provide valuable diversification benefits for investors. As such, real assets are appropriate for inclusion in most diversified investment portfolios.

With that in mind, what are some examples of real assets that investors should consider? 

Property

One specific area of the property market that our team of investment advisors believes offers compelling investment potential at present is property that is designed for the elderly, such as retirement villages, care homes and nursing homes. This type of property tends to generate regular, stable cash flows, and landlords are able to raise rents as inflation rises. With the UK population ageing at a rapid rate (the number of over-75s is expected to double over the next 30 years), demand for this kind of property should remain robust in the years ahead, resulting in healthy returns for investors.

Another niche area of the property market that we believe has the ability to outperform in a rising-interest-rate environment is property associated with the e-commerce industry such as warehouse storage facilities. This type of property – which is in high demand from online retailers such as Amazon, Argos and ASOS – looks set to provide investors with attractive returns as the popularity of online shopping continues to grow. One advantage of this particular type of property is that it can perform well at different stages of the economic cycle. When the economy is expanding and demand is rising, landlords can raise rents when leases expire. Yet during a downturn, cash flows can remain stable due to the fact that many customers are tied to long leases.

Infrastructure

Infrastructure is another real asset that can provide investors with protection in a rising-interest-rate environment. Long-term assets that deliver essential products or services such as toll roads, rail lines, energy plants, wind farms, ports, and communication towers tend to generate stable cash flows over a long period of time and quite often, these cash flows are tied to inflation. As a result, these assets can deliver healthy total returns when interest rates are rising.

Commodities

Finally, commodities can also offer protection against rising interest rates as commodities generally have a high sensitivity to changes in inflation, meaning prices often rise as inflationary pressures increase. Gold is one commodity, in particular, that we believe offers appeal right now, due to the fact that investors often turn to the precious metal when inflation is rising, which pushes its price up.

Investment advisory services

In a rising-interest-rate environment, portfolio positioning is crucial. Rising interest rates can have a negative impact on many traditional asset classes such as equities and fixed income which means that it’s extremely important that investors act to diversify their portfolios and minimise exposure to assets that are vulnerable to increases in interest rates.

At Featherstone Partners, our portfolio management services focus on absolute-return investment strategies, which aim to generate positive returns no matter what global financial markets are doing. In the current environment, we are focusing on assets that have the potential to outperform as interest rates rise. Our portfolio advisors believe that real assets, such as real estate, infrastructure and sustainable resources, is one asset class that looks set to perform well as rates continue rising. With returns from these assets linked to fundamental macroeconomic drivers and long-term economic growth trends, we believe that real assets are a sensible portfolio investment in the current financial environment.

Leveraging significant industry experience, our team identifies and carries out due diligence on some of the world’s most specialised thematic funds, in order to provide our clients with access to world-class, investment funds that few private clients typically have exposure to. We believe that through an absolute-return approach to portfolio management, we can continue to generate steady, positive returns for our investors, regardless of interest rate movements.

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