Investors should buy real assets - from wine to art - as inflation reaches a 'secular turning point,' Bank of America says

• • Bank of America forecasts an uptick in inflation and that rates will weigh on stock returns for the next decade.
  • The bank's chief investment strategist says investors should buy real assets to hedge against inflation.
  • Real assets are at their lowest point relative to financial assets in almost 100 years, he writes.

Since the election of President Joe Biden, inflation and its potential comeback have been hot economic topics. Pumping trillions of dollars into the economy could overheat it, critics say, while others see few signs of runaway inflation, either now or in the near future.

Freak events in early 2021 like the Texas freeze and the giant ship stuck in the Suez Canal haven't clarified the issue, as they contributed to inflationary shocks that may be "transitory" or may not be.

Bank of America's chief investment strategist, Michael Hartnett, has seen enough to declare a "secular turning point" on inflation and anticipates that stock market returns will be lackluster over the next decade. Stock investors who've seen a roughly 10% annual return from recent decades should expect that gain to go down to 3% to 5% over the course of the 2020s, he added.

But he has a recommendation: Real assets are a more overlooked part of the market that may offer investors protection against inflation while diversifying their portfolios.

In a recent note Hartnett said that real estate, commodities, and even collectibles like wine, art, diamonds, and cars could outperform in the next decade. Investors don't need to own the physical assets, Hartnett added, but instead can own REITs, and specialized funds that focus on these assets.

Real assets are positively correlated with inflation and interest rates, unlike financial assets like stocks and bonds, Hartnett said. During "the Great Inflation" of the 1970s, real estate and commodities outperformed large cap stocks and government bonds. He added that in eras where bonds and stocks struggle, real assets have provided superior risk-adjusted returns.

Over the past 5 and 10 years as inflation fell to the lowest average levels since the 1960s, real assets have seen lower returns and lower volatility, according to BofA data. Now, the price of real assets relative to financial assets are at the lowest point since 1925, making them attractive investments according to Hartnett.

Real assets are also underowned, with only 5.5% of the total market cap of all ETFs exposed to real assets.

Additionally, since 1926, collectibles (8.1%) and commodities (6.3%) have offered higher returns than government bonds (6.0%) and cash (3.4%), albeit with higher volatility.

Bank of America suggested investors seek out funds like the Fine Art Group, Classic Car Fund, and the London International Vintners Exchange Fine Wine Fund Index (FWIFFWID), in addition to REITs and commodity funds if they're looking for real asset exposure.

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