Soft landing or no landing? Trump or Harris? These are some of the questions investors are asking, as they try to position portfolios for 2025. With the probabilities continuing to shift, real assets’ generally positive performance so far this year has been led by specific subcategories that have benefitted from themes such as artificial intelligence, geopolitics and rate cuts, even as pure beta exposures to commodities and bonds have delivered more modest returns.
In commodities, gold has been the main return driver, as central bank demand, Middle East tensions and rate cuts have boosted precious metals. We continue to see tactical opportunities from geopolitics and scarcity plays; however, we believe that many producers can add value in sideways markets for their underlying commodities. Areas like mining could benefit if we see a continued decline in interest rates with a soft landing, or a shift toward more protectionism in a Trump reelection scenario. Weighed heavily in commodity benchmarks, energy has been down by double-digits this year, but being long energy producers has still been a positive trade. Meanwhile, in agriculture, abundant supply and favorable weather conditions have pressured grain prices and fertilizer names, but also boosted food producers.
One of the most important trends in real assets this year has been the rise of AI, with surging demand for datacenter capacity not only benefitting datacenter REITs but also increasing energy consumption. According to BCG, datacenter power demand could triple [by 2030], while Wells Fargo expects overall U.S. power demand to grow 16% [over the same period]. Given broader electrification, we believe that many utility sectors have the potential to benefit from expanding capacity, particularly if the regulatory environment becomes more supportive. Renewable energy sources like wind, hydro and solar have gained favor but are likely insufficient to meet growing power needs. Nuclear power enjoys bipartisan support and is undergoing a renaissance, for example as Microsoft and Google have announced sizable long-term agreements for new capacity; however, with the high cost and long timeline of building new plants, demand for natural gas should increase as well.
As we head toward 2025, we see both opportunities and challenges in the real asset space. The continued pressure on long-dated bond yields may be a reminder that real assets remain important diversifiers to traditional 60% stock/40% bond portfolios. However, we believe investors need to maintain a nimble and diversified approach through active management in order to successfully navigate this evolving landscape.
