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12/13/2024
Alternative assets in general, and European infrastructure in particular, may help returns and diversification potential to an investor’s asset portfolio and support European Transformation.
“The only way to become more productive is for Europe to radically change,” former Italian prime minister and president of the European Central Bank Mario Draghi wrote at the start of his recent report on the future of European competitiveness.[1] Specifically, Draghi argues, Europe needs to digitalize and decarbonize the economy and increase its defense capacity.
As we argued in a report, this political backdrop makes Alternatives in general, and Europe in particular, an interesting route to identify and capture transformative investment opportunities.[2] Our Chart of the Week is drawn from this work and shows how inclusion of alternatives may offer a potential compensation for the lower equity returns in the portfolio. Our new paper expands on our many other European Transformation reports.[3]
Alternatives tend to occupy a place in the risk-return spectrum between traditional lower-risk rates and investment grade credit on the one hand and riskier equities and high yield credit assets on the other. The attractive risk-return potential of alternatives compared to fixed income and equities is underpinned by the fact that they combine some of the most interesting features of both worlds: potential for high income and lower mark-to-market volatility on the one hand, a potential hedge against inflation and a degree of growth exposure on the other hand. European infrastructure’s diversity, value and supportive policy also offers potential benefits relative to other regions.
Chart
Sources: DWS LTCMA, DWS Investment GmbH as of 09/30/2024
The chart illustrates that private infrastructure currently stands out in combining strong recent performance over the past decade, with solid prospects for the next 10 years, based on our Long-Term Capital Market Assumptions (LTCMA) framework.[4] Moreover, private real estate and private infrastructure not only may offer relatively lower correlations with traditional asset classes, but do not tend to be especially correlated with each other. This suggests potential diversification benefits, for example in scenarios of higher inflation (a real risk, given the potential for increased tariffs and deglobalization in future years).
Europe has transformed itself many times in the past. Yet the transformation required now is arguably unprecedented. The long-term nature of transformative investment means that some of the most appropriate opportunities are in private markets, where investors can take the long-term view. Given their significant contribution to energy and climate security, we identify buildings, transportation, and energy as the three primary sectors that could drive the radical transformation of the continent’s sustainability and digitalization ambitions. And, as the largest contributor to emissions in the European region, infrastructure offers a multi-billion-euro opportunity in shifting Europe’s energy supply to more efficient and sustainable energy sources.
Report by Mario Draghi for European Commission (September 2024), available at: Future of EU competitiveness
DWS (November 20th, 2024) Europe’s investment appeal: The investment routes to express European Transformation, available at: Europe’s investment appeal
DWS European Transformation Research Hub: November 2023
DWS (March 19th, 2024) DWS Long View 2024, available at: DWS Long View
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients.
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