When it comes to investing, what is old is new again.
That is the view from Paula Horn, CIO of Brookfield Public Securities Group, an alternative asset manager with $24 billion in assets. “It’s the dawn of old-economy sectors leading the market,” Horn tells Barron’s.
That means utilities, infrastructure, and quality office real estate could be long-term winners.
The firm’s recent 2023 outlook lays out several investment themes that it says are likely to create opportunities across real assets. But Horn also cautions that markets are likely to remain volatile in 2023 given the uncertain growth outlook amid high inflation and rising interest rates.
While recession expectations are high, the firm believes it will “likely be a shallow one.” Last year, inflation was the top issue for investors, but this year, it will be growth and what the Federal Reserve does on interest rates.
The central bank voted unanimously on Wednesday to lift rates by another quarter of a percentage point, marking the eighth increase in the past year and bringing the target for the federal-funds rate to a range of 4.5% to 4.75%. The widely expected move to downshift to a 25 basis-point rise reflects the progress the Fed has made so far in tackling price growth, which has slowed steadily since the summer.
“It would be premature, it would be very premature, to declare victory or to think that we’ve really got this,” Fed Chairman Jerome Powell said in a press conference following the announcement. “We see ourselves as having a lot of work left to do.”
Horn says it is “highly unlikely” the Fed will cut rates this year, “unless we are wrong and there is a very deep recession.” She is keeping a very close eye on company earnings as a gauge of the health of the economy.
“Earnings for us are really where it’s all at because, ultimately, companies employ people and companies will lay off people to defend margins and profitability,” she says. “Right now, earnings are on a one-way train down and until we see that level off, it’s unclear where we end up with the employment backdrop.”
A number of companies have missed earnings and announced layoffs in recent weeks.
(AAPL), Google parent
(GOOGL), and auto maker
(F) are the latest companies to disappoint. Meanwhile more than 57,000 tech workers have lost their jobs so far this year,
One of the themes Brookfield PSG calls out in its outlook is decarbonization. The firm notes there is a global urgency to decarbonize, with many governments and companies setting 2050 net-zero emissions targets. The reduction targets, coupled with the cost-competitiveness of renewable power generation—a new-economy sector—and the need to for secure and reliable sources of energy could lead to “an unprecedented infrastructure investment in the global build-out of renewable power generation to decarbonize the power sector, the world’s largest source of carbon emission.”
Brookfield PSG’s actively managed strategies invest in listed stocks and bonds across real assets. The top holding of the Brookfield Global Renewables & Sustainable Infrastructure Fund (GRSIX) is renewable-energy and utility company
As Barron’s has previously reported, the company not only benefits from growing renewable power generation, but also is a play on the hydrogen economy.
“Utilities will also need substantial investment to build and upgrade transmission and distribution infrastructure, so it can connect sources of renewable supply with power demand. This could support the capital investment and earnings growth outlook for related utilities,” writes Brookfield PSG.
Another theme that Brookfield PSG says will create opportunities for investors is deglobalization—or the “onshoring” of critical industries. Recent events from the Covid pandemic to the war in Ukraine have underscored the importance of having secure and resilient supply chains and energy sources, according to the note.
“The pandemic related supply chain disruptions showed that transportation infrastructure must evolve to become more resilient,” says Brookfield PSG.
One company in the top three holdings of Brookfield Global Listed Infrastructure Fund (BGLYX) is pipeline and energy company
(ENB), which is helping to bring key energy sources closer to home.
The firm is also bullish on quality real estate in the office sector, with “demand for quality” another one of the 2023 themes.
“In the office sector, rents today in many cities around the world are much higher than pre-Covid-19—but only for the best properties,” says Brookfield PSG. “We believe recognizing this flight-to-quality trend is key to selecting the right positioning in this inexpensive sector, which still faces question marks around the return-to-office trend.”
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