Real assets to outperform next year

Donald Trump’s commitment to infrastructure investments means real assets are set to outperform in 2017, according to ETF Securities.

Real assets – assets such as commodities, real estate, land and infrastructure assets – will be supported by the President’s $1 trillion (€0.94 trillion) commitment to rebuild the United States infrastructure, and are likely to outperform in 2017.

Despite varied fundamental drivers, demand from emerging markets, particularly China, is likely to be a continued source of commodities consumption, and substantial cutbacks to capital expenditure budgets will restrain supply. The resulting fundamental tightening in underlying conditions should, ETF Securities project, keep commodities well supported in coming years.

Moreover, the firm notes real assets tend to outperform traditional portfolios in a rising inflation and low interest rate environment, and it expects investor appetite for these assets to increase as a result.

In particular, precious metals and oil should strengthen in 2017, with gold’s fair value rising to $1440 per ounce (it currently trades at around $1300 per ounce), and silver’s fair value to $23 per ounce (from $19). The ending of China’s “speculative frenzy” on industrial metals is likely to weaken prices in the near term, but prices should however rebound in the longer run as infrastructure spending boosts demand for industrial metals.

James Butterfill, head of research and investment strategy at ETF Securities, said the US Federal Reserve will remain behind the curve and inflation will rise faster than the central bank will raise rates, keeping real rates very low, which is positive for gold and silver prices.

ETF Securities also expects sterling’s weakness relative to the euro to reverse as the European Central Bank continues with its stimulatory monetary policies. The dollar is likely to continue to strengthen, and the safe haven trade that has benefitted the Swiss franc is likely to persist as well, as many EU members are facing major elections in 2017. As a greater sense of stability in Europe gains momentum afterwards, this safe haven trade is likely to unwind according to the firm.

“2017 looks like a year of more populism and more volatility, and inflationary policies as a result. The current Trump bump in equities and risk on assets may well be short-lived – his presidency looks most positive for real assets,” Butterfill concluded.

©2016 funds europe

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