Globally, long term Interest rates have followed declining trajectory. We have witnessed negative interest rates for prolonged periods in certain developed economies. Globally, inflation for last decade has broadly remained within respective central bank targets. In the backdrop of liquidity injection by Central Banks during Covid times and the recent Russia-Ukraine spat, world economy is expected to be plagued by stagflation. Stagflation is a period when slow economic growth and joblessness coincide with rising inflation.
Under the backdrop of falling rates, real returns from Fixed Income securities have declined and remained low. Though equity out performance during these times helped in reducing overall portfolio variance, real contribution from fixed income securities has suffered. Moreover, in the present scenario where core Inflation remains sticky and central banks looking to raise rates aggressively, investors need to look for alternate assets to contribute to the “real returns”.
Real estate usually performs well under inflationary scenario as underlying rents can be raised. Investment products which invest in Real estate & Infrastructure assets have been available for retail Investors in India for quite some time now.
Appending how Real Estate Trusts & Infrastructure Trusts assets have performed in India over past 5 years.
Observation – Equal weighted Portfolio of above-mentioned Infrastructure products yielded around 13% return since April 2017. Considering an average Inflation of 5.6% for the same period, real return for the REIT/InvIT portfolio stands at around 7.4%.
For similar period Fixed Income products have delivered around 6%. There hasn’t been any real return on such Investments after factoring Inflation.
Current scenario of rising inflation certainly warrants exposure towards investments that can contribute towards “real growth”.