Real Assets or Financial Assets?

By Plenisfer Investments (part of Generali Investments ecosystem)

After a two-year tightening of central banks, at the macro level, despite market expectations, we think rates will remain "higher for longer": the decline in interest rates began to be discounted by the market starting last October but following more robust economic data and the slowing of the decline in inflation, these expectations have gradually receded.

The underlying geopolitical scenario remains unstable due to the two major outbreaks of war, the Russian-Ukrainian and the one between Israel and Hamas. This continues to impact the investment landscape, with direct contribution to the recovery of commodities and the energy sector in particular.

In terms of asset allocation, we think it should be oriented toward favoring real assets over financial assets. In equity markets, the problem of excessive concentration of indices, both global and U.S., on a few of the best-known stocks such as the so-called "Magnificent Seven" persists. This excessive concentration could also be a driver of downward volatility in the event of a market correction. The correct approach, in our opinion, should be a diversified approach that places a share of real assets alongside stocks and bonds. Thus, alongside a more strategic position on gold and energy stocks, we think that targeting those commodities that are essential to the energy transition, characterized by limited supply and growing demand, such as copper or uranium, should remain the focus for the coming months of the year. Although uranium was among the best-performing commodities in 2023, with prices up more than 80% thanks in part to the reopening of new nuclear power plants in several countries, primarily China, at Plenisfer we think the current bullish phase is long-term.

In our view, an efficient way to look at these allocations is through ETCs that offer direct exposure to the commodity by providing protection from the difficulties producers are facing. But if you have a medium- to long-term time horizon, it will be the producers' stocks that can offer individual opportunities. In addition to energy commodity producers, gold producers will also have to be monitored: the factors, such as central bank purchases, that have supported its 25% growth in three years remain. On the other hand, mining company stocks have valuations at historic lows, which have been hurt in the past by lower investment in new production capacity and rising production costs. However, the rise in raw material will allow companies to return to efficient mining, restoring operating margins. In addition, extremely compressed valuations should not be forgotten, which may represent an opportunity in light of strong balance sheets characterized by levels of capital expenditure and debt well below the levels seen in previous positive gold cycles.

Looking at the coming months, we see opportunities in emerging markets versus developed markets, with the exception of China. Here we think it is necessary to be very selective. A choice focused on high-quality stocks bought at reasonable prices could be the winning combination.

In currency terms, we then expect a secular weakening of the dollar from which emerging market bonds issued in local currencies could benefit. The election phases of countries such as Mexico or Indonesia will have to be monitored with particular attention.

Uncertainties, macroeconomic and on monetary maneuvers, impose caution about the prospects for monetary policy easing: this has particularly impacted the bond market, which we think may continue to offer attractive opportunities. We believe it is best to prefer companies with solid fundamentals, Investment Grade. We see opportunities in the short- and medium-term part of the curve, and we think companies, in the U.S. and Europe, that generate competitive cash flows, such as those in the energy and telecommunications sectors, or, selectively, in the financial sector, are to be preferred.