#Market Strategy — 04.01.2017

How Tangible Assets May Help To Manage Inflation Risk

Xavier Timmermans & Marc Eeckhout

Having a direct exposure to real assets is a smart way to maintain attractive long-term returns, enhance portfolio inflation protection, and reduce downside risk. Real assets include precious metals, direct real estate, agricultural properties and forests.


Inflation expectations surged globally after Donald Trump’s election victory, on the back of higher growth and deficits in anticipation of a forthcoming fiscal package. Tax cuts and larger public spending on infrastructure and defense in a context of nearly full employment (the unemployment rate was 4.6% in November) could boost wages and inflation. The decision from OPEC (Organization of the Petroleum Exporting Countries) to reduce output by 1.2 million barrels per day over the next six months with an additional cut of 558,000 bpd by Russia and other non-OPEC producers is fuelling inflation fears.


Gold prices have recently suffered from rising bond yields and the strong dollar. Nevertheless, we keep a positive stance on gold and stick to our expected trading range of $1200-1500/oz.

  • Real rates matter for gold. Gold could rally if inflation or inflationary expectations accelerate, which would lead to real rates staying relatively low or even turning negative.
  • Gold is one of the few diversifiers left in this highly-correlated world. Gold should play a safe-haven role in the event of geopolitical shocks or a sharp market correction.
  • The world’s gold mine supply fell in the first three quarters of 2016. Today, there are relatively few new projects and expansions expected to come on stream in the near-term.
  • Since the pullback of the gold price, physical demand has begun to recover. Higher gold prices in the first half of 2016 dampened demand for gold jewellery.
  • Central banks in emerging countries (e.g. Russia) should continue to increase their holdings.
  • In China, new financial products, such as gold ETFs (exchange-traded funds), also started to register inflows which might grow significantly over time.

Direct real estate

Direct real estate (i.e. bricks and mortar) offers a strong protection against inflation. The rationale behind this is that rents are indexed to inflation in many countries. As a consequence, property values are projected to edge up as well, albeit with a time lag, depending on the country. 

Some consideration: the cost of borrowings should be capped prior to any inflation.  Otherwise inflation may result in a higher cost of finance. This would partly offset an increase in higher revenues.

Agricultural properties and forests

Agricultural properties represent a good alternative for investors willing to diversify their portfolio. They are not correlated to the financial markets and provide revenues which are usually indexed, while offering a long-term capital appreciation.

BNP Paribas Wealth Management has a dedicated department, Agrifrance, which offers clients advice (on buying and selling) and facilitates transactions in agricultural properties, vineyards, forests and country estates.

  • Agricultural properties: most land (74%) on the market is leased, demand is resilient, gross yields vary between 2% and 4%, and the French market is attractive compared with neighbouring countries.
  • Vineyards: with the exception of the most renowned locations which have become quite expensive, prices have increased moderately in recent years. Therefore, it is still possible to find reasonable yields (leased vineyards) and potential for capital appreciation.
  • Forests:  volatility of timber prices has no impact on forest prices and demand exceeds supply.

Risks to our base case

Gold : downside risks have increased since the US election as markets have shifted their focus to the prospect of an expansionary fiscal policy which would push up real yields. So there is a risk that bond yields will increase more than the forecasts in our base case scenario, leading to attractive real rates which could be detrimental for gold.

Agricultural properties, vineyards and forests: investments in agricultural land and forests are by nature long term and may be considered as illiquid. Quality and price vary considerably according to location, topography, accessibility as well as economic and technical yields, etc.