AEW 2020 Global Perspective: how political uncertainty, climate change and global population growth impacts asset allocation

AEW has identified five overriding trends which shape asset allocations and investment styles across the U.S., Europe and Asia Pacific, which also include structural demographic changes and slowing economic growth, which were detailed in yesterday’s article.  Today we complete the summary of AEW’s analysis, as outlined in the whitepaper, 2020 Global Perspective.

Outsized political uncertainty

Much of investors’ concern over persistent outsized political uncertainty centered specifically around international trade, according to AEW, which cites three developments which may presage a broader normalisation.

Michael Acton, Glyn Nelson and Hans Vrensen, heads of research for US, Asia Pacific and Europe, respectively, wrote:

  1. Small scale, but significant easing of U.S. trade tensions with China have emerged with the so-called “Phase One” trade agreement. However, Europe could be a potential next target for U.S. trade policy.
  2. The large Conservative electoral margin in Britain and the subsequent Brexit vote in Parliament seem to clarify Britain will indeed move ahead with its European exit in 2020. But, the self-imposed UK deadline of year-end 2020 could still trigger a no-deal Brexit.
  3. The U.S. House of Representatives and Senate overwhelmingly approved the revised North American Free Trade Agreement, now known as the U.S.-MexicoCanada agreement (USMCA).

Significant unease remains in many parts of the world, AEW added. “More recently the global outbreak of the COVID-19 will likely cause disruption to the global services outlook through reduced travel and spending as well as affecting supply chains.”

ESG and climate change

The importance of environmental, social and governance (ESG) in real estate has increased significantly over the last two years. GRESB, established in 2009 by a group of large pension funds who wanted access to comparable and reliable ESG performance data, has become the mainstream ESG benchmark for real estate and infrastructure investments across the world. The number of funds captured in the benchmark has risen from 198 in 2010 to 1,005 in 2019, with the value of the dataset now USD 4.5 trillion in real estate and infrastructure assets.

Michael Acton, Glyn Nelson and Hans Vrensen, heads of research for US, Asia Pacific and Europe, respectively, wrote:

“Due to Europe’s early implementation of green initiatives, this region is the most represented region in GRESB with 490 real estate funds, totalling USD $1.2 trillion of gross asset value (GAV). In addition, evidence from the REIT markets suggests that investors do not need to sacrifice returns to invest in green certified and energy efficient buildings. New initiatives using building-level data can also help avoid potential bias in a self-reporting survey. As investors come to grips with potentially higher capital expenditures to meet stricter future ESG regulations, it is likely that asset prices will need to rebalance. This offers opportunities for professional managers to add value.”

Population growth

The world’s population is aging rapidly and growing at a slower pace for various reasons, identified AEW. These include medical advances and better lifestyles pushing up longevity while cultural factors push down birth rates. This is true in the U.S., most of Europe, China and Japan.

Michael Acton, Glyn Nelson and Hans Vrensen, heads of research for US, Asia Pacific and Europe, respectively, wrote:

“Recent U.S. Census Bureau data shows population growth over the last year at the lowest level in more than a century. Similar data for Japan confirms total births falling to the lowest level since records began in 1899 and total population decline surpassing 500,000 for the first time in history.

“In addition, increased income and wealth inequality has triggered a potentially misplaced resistance to immigration, further pushing down population growth in both the U.S. and Europe. As most people live longer and many also work longer, we might need not only more, but also different places to work and live. Real estate development focus has started shifting away from single-purpose buildings towards multi-use, integrated uses. In addition, AEW anticipates structural demand for segments such as senior housing and medical offices.”

james.wallace@realassetmedia.com