For super funds and their advisers

Alternatives may benefit from ESG and inflation

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Every cloud has a silver lining. Alternatives may benefit from both the trend to ESG strategies and the extra inflationary pressures which ensue, according to the mid-year outlook from Franklin Templeton.

Two of Franklin Templeton’s affiliate managers, Clarion Partners and ClearBridge Investors, say in the outlook report that accelerating growth and reflationary environment will benefit both real estate and infrastructure – their specialist asset sectors.

Tim Wang, Clarion’s head of investment research based in New York, says the commercial real estate firm believes 2021 marks the beginning of a new real estate market cycle.

“As demand continues to recover across most markets and property sectors, rising occupancy and higher effective rents should drive higher net operating income, supporting higher dividend and property appreciation,” he says in the report.

“In our view, we believe that real estate—income with growth—ought to be an important part of portfolio allocation strategy given accelerating economic growth and the reflationary environment.”

Nick Langley
Nick Langley, ClearBridge’s co-manager of all global infrastructure strategies says investors should benefit from global stimulus plans as policymakers agree on aggressive multi-decade carbon reduction targets.

Sydney-based Langley is a co-founder of ClearBridge’s predecessor firm, RARE Infrastructure. He says: “This investment will allow infrastructure and utility assets to earn stable and often regulated returns, off capital deployed into such areas as lower-carbon generation, strengthening of electricity grids and lower-carbon fuels such as hydrogen.

“While there are nuances to how environmental, social and governance efforts will influence different areas of infrastructure, we believe it will pay to have some tactical ability.”

Across the asset classes for the Franklin Templeton group and affiliates, the report says that the remainder of 2021 will likely prove challenging with potential key themes of guarding for inflation, searching for income, seeking quality companies as well as looking beyond stocks and bonds. Key views include:

• Fixed income activity cannot avoid looking out for inflation and income. The opportunities across corporate credit markets will be selective and uneven, and we believe active management will be important. Investors should consider sector, duration and quality rotation.

• Equity discussions converge on ‘quality’ with investors across styles and market capitalization ranges believing the ‘junk trade’ is over and quality is the priority beyond structured definitions of growth and value. Different managers offer different definitions of quality companies, helping investors navigate the market while analysing supply chain disruptions, economic cycles and growth.

• Real estate takes us directly to the impacts of inflation. The straightforward mechanism of raising rents under improving economic conditions allows properties to adapt to economic supply and demand. This mechanism makes commercial real estate particularly interesting in the second half of this year.

• Infrastructure has regional catalysts and a big nod to sustainable investing and environmental, social and governance (ESG). Significant initiatives around the world are driven from social and government motivations that will allow infrastructure to have diversification benefits beyond the value of the investment. These benefits will be longer term than the second half of 2021.

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