Are real assets still defensive?

In a bear market, some investors seek protection in real assets, with their predictable cash flows. However, in this time of economic uncertainty, very little is predictable.

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While it’s clear the coronavirus will cause economic weakness, “maybe it’s an intermediate or short-term weakness,” said Larry Antonatos, managing director and portfolio manager at Brookfield Asset Management’s Public Securities Group in Chicago.

Or, “it could be longer-term weakness,” he said. “We just don’t know how it will go.”

Still, it’s a reasonable call that certain sectors within real assets will likely be affected more than others.

Antonatos was speaking in a March 5 interview, before last week’s massive market swings.

“Many people are choosing not to travel,” Antonatos said, and many governments are limiting trips beyond national borders. This will impact hotels, though it’s not yet clear for how long.

As a result, Antonatos, who manages the Renaissance Real Assets Private Pool, said he’s “generally avoiding hotel investments today.” Once the worst of Covid-19 passes, he’ll look for cheap hotel stocks with cash flows that are expected to rapidly recover.

“We may, at some point, aggressively add to our hotel positions to take advantage of the growing cash flows,” he said.

Less travel is also impacting infrastructure’s GDP-sensitive transportation sectors, including airports, seaports and toll roads.

“Airports are being impacted the worst; seaports, to a lesser extent as global trade declines,” Antonatos said. While toll-road traffic has held up better, it too could become weaker, he said.

Thus, he’s avoiding significant investment in transportation. Again, as the worst of the coronavirus passes, he said he’ll look for attractive valuation opportunities in the space and “ride the wave of growing cash flows.”

Within infrastructure, oil and gas pipelines are also being impacted.

“The coronavirus is leading many analysts to predict a drop in demand for crude oil in 2020,” Antonatos said.

World oil demand in the first quarter is expected to decline by the largest volume in history, surpassing the decline during the financial crisis, as forecasted earlier this month by IHS Markit, the London, U.K.­­–based global information provider.

Despite some long-term pipeline toll agreements, “we are seeing pipeline companies in the infrastructure space being underperformers, on macroeconomic weakness, just as we’re seeing the airports being underperformers,” Antonatos said.

Real assets that are really defensive

Though cash flows are challenged, Antonatos is bullish on some real assets.

“We would look to the most defensive sectors within real estate and infrastructure,” he said, including real estate with long leases.

“One category is triple net leases,” Antonatos said. “These are generally properties 100% occupied by a single tenant,” such as a corporate headquarters, retailer or franchise restaurant.

If the tenant has good credit quality and can withstand economic weakness, a 20-year lease is less risky and more defensive than an apartment with a one-year lease, a self-storage building with a one-month lease or a hotel with a one-night lease, he said.

The most defensive asset within infrastructure remains monopolistic utilities.

“If you are the only electric utility in town, the only water utility in town, you have a significant defensive position,” said Antonatos.

“Whether the economy is good or bad, customers still wake up every morning, turn on their lights, brush their teeth, take a shower and purchase the essential services provided by electric and water utilities.”

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