As in 1970s, real estate investment trusts could overcome shortcomings of asset classes such as commodities and gold
Investor hopes of inflation easing sufficiently to prompt a central bank pivot have been dashed time and again in the second half of this year.
Then, as now, oil played no small part. In the 1970s there were two separate oil crises. The first of these, in 1973, was caused by producer cartel Opec embargoing countries that supported Israel in the Yom Kippur War. The second, in 1979, was caused by the Iranian revolution. Today, Russia’s invasion of Ukraine has caused supply disruptions in key commodities, including natural gas and oil.
Even though neither equities nor bonds performed well, bonds actually outperformed equities during these periods. The reason for this was twofold. First, high rates of inflation are often accompanied by low economic growth rates . Second, equities are longer-duration assets than most fixed income assets, so equity valuations suffer as the result of a higher discount rate being applied to the stream of future cashflows to which equity holders are entitled.
However, the price of a commodity for future delivery is usually higher than the spot prices of that commodity to account for the storage costs and interest charge compensating the person whose capital is tied up in storing the commodity. These charges need to be deducted from the return quoted above and could move the return on commodities into negative territory.
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