Real assets insights: Q2 2025 Real assets stay in focus amid inflation and policy support

Real assets strategy advanced during the second quarter, supported by better risk appetite and sticky inflation. Real assets are poised to benefit from rising inflation, better sentiment, and secular tailwinds.

For the second quarter of 2025, escalating trade disputes and war in the Middle East contributed to financial market volatility and investor caution. As a result, global equity markets experienced significant volatility in the quarter. Despite these headwinds, most major asset classes posted positive returns, supported by resilient economic data and easing investor fears.

Risk assets initially declined due to geopolitical tensions and trade shocks but rebounded as US-China trade talks resumed and tariffs paused. Bonds were volatile—initially hit by inflation fears but later stabilized. Treasuries saw mixed performance as the yield curve steepened. The 2-year yield fell 17 bp to 3.72%, while the 10-year and 30-year yields rose to 4.23% and 4.79%, respectively. The dollar index saw its sharpest quarterly drop since late 2022, while commodities lagged due to falling energy prices.

Quarter in review

The real assets strategy rose 2.91% for the second quarter, right in line with its composite benchmark. The month of April was the worst, falling by almost 2%, but May and June each managed to gain approximately 2%. The strategy is up over 9% year to date. The longer-term returns of the strategy remain solid, and since its inception in 2005, the strategy continues to maintain its lead over the composite benchmark by over 22 bp annually and has provided an annual return of 4.39%.

The asset class that dragged the strategy down the most was commodities, losing 1,74% for the quarter. This was driven by rising trade tensions, unpredictable policy shifts, and a slowdown in global economic growth. Sector-wise, energy, agriculture, and industrial metals recorded declines, while precious metals advanced. The energy sector was down by 10.9% for the quarter with both crude oil and natural gas prices declining. The West Texas Intermediate crude oil index fell over 5%, despite a big ramp in Middle East tensions, with the OPEC+ decisions to accelerate the easing of voluntary production cuts and the global growth worries surrounding trade policy upheaval the big overhangs.

Meanwhile, the Bloomberg Natural Gas Sub-Index registered double-digit declines, down 22.2%, amid robust production growth and low seasonal weather-driven demand. The industrial metals sector finished the quarter largely unchanged. The precious metals sub-index delivered a 4.9% gain, as persistent market uncertainties—ranging from trade tariffs to geopolitical tensions—continued to drive investor demand for safe-haven assets such as gold and silver. Gold prices increased by 5.2%, while silver gained 3.7%. The agricultural sector declined 4.0% for the quarter. Corn prices dropped over 8% during the quarter, driven by ample supplies from Argentina and Brazil. Coffee and sugar also saw sharp declines, with prices falling 19.1% and 14.3%, respectively. Despite losses for this quarter, commodities are up over 7% year to date.

Also hurting the returns of the strategy was Real Estate Investment Trusts (REITs). The Down Jones US Select REIT Index was down 1.7%. Within the property sector, diversified, office, specialty, and data centers led, while residential, industrial, and healthcare lagged.

Equity markets faced headwinds, with major indices nearing bear market territory by the end of Q2. The Liberation Day tariff announcement on 2 April triggered a sharp market selloff. The reciprocal tariff package exceeded expectations, sending the S&P 500 down 12%. Markets did come off the lows after the US administration softened its stance. Within the strategy, the strongest gains were made in global infrastructure stocks, rising 10% for the quarter – particularly in Industrials. The second-best performer in the strategy was global natural resource stocks, rising 5.2%, led by the agriculture and metals sectors, which offset weakness in energy. Year to date, global infrastructure and global natural resource stocks are up approximately 14% and 15%, respectively.

Over the quarter, Treasury Inflation-Protected Securities (TIPS) underperformed comparator Treasuries by -0.5%. The full TIPS Index (Barclays Series-B) returned 0.38% and the 1-10 year returned 1.07%, while comparator Treasury indices returned 0.96% and 1.49%, respectively. Headline US consumer price inflation data was in line with expectations (at 2.4% YoY), but core CPI readings were below expectations (+2.8% YoY vs. +2.9% expected). In the updated projections, the US Fed expects PCE inflation to average 3% in 2025 compared to 2.7% projected in March. Year to date, US TIPS in the strategy were up 5%.

Investment outlook

The outlook for oil is cautiously optimistic, supported by firm demand and tightening global inventories. Demand has consistently exceeded expectations, allowing markets to absorb steady production increases and keeping inventories lower than anticipated. While economic growth is expected to slow, we are still projecting growth to remain positive and improve into next year, which could help sustain demand. On the supply side, the Organization of the Petroleum Exporting Countries (OPEC) has agreed to raise oil production by 547,000 barrels per day in September, but the actual increase is likely to be closer to 200,000 barrels per day due to overproduction by some members (Kazakhstan, Kuwait, Iraq) and others falling short of quotas (Russia). In the United States (US), production is expected to plateau and gradually decline, with falling rig counts and downward revisions to shale output. US oil stocks are significantly below last year’s levels and well below the trailing five- and seven-year averages. The limited increase in production has also reduced spare capacity, making markets more vulnerable to supply shocks. Currently, Saudi Arabia remains the only country with meaningful spare capacity. Geopolitical tensions in the Middle East persist, and the US appears poised to introduce new sanctions against Russia and Iran, which could further disrupt energy markets. Overall, oil prices are expected to remain rangebound with an upward bias, potentially moving into the mid-$70 per barrel range.

The near-term outlook for industrial metals remains cautious due to a mix of offsetting factors. While some trade tensions have eased, uncertainty—particularly involving China—continues to linger. Additionally, weak manufacturing activity and the removal of electric vehicle (EV) credits present further headwinds for the sector. Despite these challenges, supply and demand fundamentals remain supportive, and a weaker US dollar is generally beneficial for metals. Pro-growth policies in the US and stimulus in China should also help to sustain demand. In the short term, metals are likely to trade within a range and may experience heightened volatility but could experience further appreciation as supply, especially in copper, faces challenges and demand remains firm. However, the outlook improves over the next few months, particularly if the Federal Reserve begins cutting interest rates, trade clarity increases, and manufacturing activity shows signs of recovery.

The outlook for gold remains positive. On the one hand, the easing of trade tensions, the absence of fiscal contraction at the federal level, and the potential resilience of the equity market—driven by strong corporate earnings—pose challenges to gold’s performance. These developments reduce the appeal of gold as a safe-haven asset in the near term. However, there are still reasons for optimism. The Federal Reserve is expected to resume rate cuts in September, which would likely lower real interest rates and support gold prices. Additionally, signs of weakness in the US labor market point to softening economic growth, and when combined with persistent geopolitical uncertainty, these factors serve as tailwinds for the yellow metal. Demand for gold also remains firm, providing a fundamental base of support. The trajectory of the US dollar is another key variable to watch. A further decline in the dollar would be supportive of gold, particularly if Fed rate cuts lead to a convergence between US and global yields. However, the dollar experienced a significant selloff in the first half of the year, and tariffs could have adverse effects on economies outside of the US, potentially strengthening the dollar and limiting gold’s upside. Overall, while gold faces near-term challenges, the broader macroeconomic and policy backdrop continues to offer potential for continued strength.

Natural resource equities have performed well, supported by improved risk appetite, renewed inflation concerns, and stronger-than-expected growth expectations. Looking ahead, these equities may continue to benefit from improving sentiment, particularly as trade tensions ease and pro-growth policies in the US take effect, with limited fiscal contraction anticipated until late 2026. Tax reforms introduced under the One Big Beautiful Bill (OBBB), including provisions for immediate expensing of capital investments and full deductibility of domestic R&D, are expected to enhance capital efficiency and cash flows, potentially boosting earnings, and investor sentiment. Furthermore, valuations remain relatively attractive, and natural resource equities could benefit from rising inflation moving forward as goods inflation has been rising and service inflation just increased. The ongoing secular themes of artificial intelligence and green energy transition are also likely to support select integrated oil and gas companies.

Global infrastructure equities are well-positioned to benefit from their defensive characteristics, particularly in an environment of economic uncertainty where stable cash flows are increasingly valued. Additionally, the renewed emphasis on onshoring and the implementation of pro-growth US policies expected later this year present supportive tailwinds. Tax reforms introduced under the OBBB may further encourage infrastructure investment, potentially boosting revenues across the sector. These changes could also enhance capital efficiency and improve cash flows, which could positively impact earnings and investor sentiment. Structural tailwinds from artificial intelligence and the energy transition remain intact, offering additional support to select infrastructure segments. While rising bond yields pose a potential risk, valuations remain relatively attractive, with price-to-earnings ratios near their 10-year average and current price-to-cash flow metrics still reasonable.

REITs appear to be supported by several favorable factors. With economic growth expected to slow, REITs may attract investor interest given their earnings typically demonstrate greater resilience than those of traditional companies during downturns. Public REITs are also relatively insulated from the impact of tariffs, as their business models rely on income generated from existing, high-quality lease agreements. Additional tailwinds include rising demand for data centers driven by artificial intelligence, the potential for further interest rate cuts by the Federal Reserve, and continued strength in defensive sectors such as healthcare. Despite these supportive elements, REITs remain overly sensitive to interest rate movements. While further rate cuts are anticipated, upside risks to yields persist, and sector-specific challenges—particularly in the office segment—continue to weigh on the broader outlook. Moreover, although most REITs maintain solid balance sheets and moderate leverage, a significant volume of upcoming debt maturities and refinancing needs could exert pressure on asset valuations.

TIPS could benefit if yields continue to decline in response to weakening economic data, particularly as signs of stress emerge in the US labor market. Additionally, inflation has recently turned higher and may continue to rise in the coming months as the impact of tariffs begins to affect consumers, providing further support for TIPS. However, breakeven inflation rates remain elevated, and improving risk appetite—driven by easing trade tensions and resilient corporate earnings—may weaken demand for inflation-linked assets. Moreover, concerns surrounding the US fiscal deficit may continue to weigh on longer-duration bonds. Taken together, while TIPS offer inflation protection, they appear less attractive on a relative basis in the current environment.

Inflation and real assets

At State Street, we anticipate that inflation will rise in the coming months, primarily driven by the impact of tariffs. We believe these effects are expected to be manageable and that shelter inflation will provide a counterbalance to the upward pressure from goods prices. However, there are several risks that could challenge this view.

One area of concern is food prices. Although the FAO Food Price Index appears to have rolled over, it has historically led to changes in the Consumer Price Index (CPI) by about a year, suggesting that food-related inflationary pressures may continue. Additionally, the Manheim Used Vehicle Index continues to climb, with its current year-over-year change exceeding its long-term average, potentially sustaining upward pressure on car prices. Further signs of inflationary persistence are evident in the prices paid components of both the services and manufacturing PMIs, which remain elevated. Moreover, the NFIB Small Business Survey shows a growing number of small businesses planning to raise prices, despite increasing signs of consumer strain. The index remains elevated, indicating that price increases among small firms could contribute to broader inflationary pressures.

Rental inflation has been steadily declining since its peak in 2023, and current indicators suggest this trend is likely to continue in the near term. Falling home prices, as reflected in the S&P Case-Shiller Composite Index, have historically coincided with softer rental markets, and this relationship appears to be holding. Additionally, real-time rent measures such as the median rent for new apartments from Apartment List and the Zillow Observed Rent Index (ZORI) have both trended lower, reinforcing expectations for continued moderation in rental inflation.

However, while the short-term outlook points to further softening, there are signs that rental inflation could reaccelerate in the future. One such signal comes from the Reserves of Depository Institutions — the total reserve balances held by banks and credit unions at the Federal Reserve. Historically, when the Fed concludes a rate-hiking cycle and begins easing monetary policy, reserve balances tend to rise. Historically, increases in reserves have been associated with rising home prices (Figure 4), which often lead to higher rents as housing affordability declines and rental demand increases. If the Fed resumes its easing cycle over the next 12 months, as we anticipate, reserve balances could rise again. This increase may have a knock-on effect on housing prices and, eventually, rental inflation. Therefore, while rental inflation may continue to ease in the near term, the potential for a future rebound should not be overlooked, particularly in the context of shifting monetary policy.

Inflation has shown signs of reaccelerating after a period of decline earlier in the year, with both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index rising over the past two months. One contributing factor is the impact of tariffs, which could raise import prices. Even if some of these costs are absorbed within the supply chain, the net effect would likely be an upward pressure on inflation (Figure 5).

Core goods inflation continues to climb—a trend we have highlighted consistently over recent quarters. This increase began well before Liberation Day and is likely to persist, particularly as tariff effects continue to filter through. At the same time, service sector disinflation, which has been a key counterbalance to rising goods prices, appears to have stalled. Monthly readings for services inflation rose in June, suggesting that the easing trend may be losing momentum. Further easing in service inflation may be challenged as the slowdown in wage growth appears to have stalled, with the Employment Cost Index and Average Hourly Earnings sitting at levels above pre-COVID levels. While the services sector is typically less sensitive to tariffs, we are observing rising price pressures in specific areas such as food away from home and medical care services (Figure 6).

Taken together, while our base case expects inflation to rise moderately and remain manageable, these risks underscore the importance of closely monitoring the underlying price dynamics that could challenge this outlook. These risks appear to be reflected in consumer sentiment, as inflation uncertainty remains elevated in the Survey of Consumer Expectations conducted by the Federal Reserve Bank of New York (Figure 7).

Real assets strategy

At State Street Investment Management, we have a seasoned, diversified multi-asset strategy that combines exposure to a broad array of liquid real asset securities that are expected to perform during periods of rising or elevated inflation.

The asset allocation is strategic and utilizes indexed underlying funds. It is being used by a variety of clients as a core real asset holding or as a liquidity vehicle in conjunction with private real asset exposures. The strategy is meant to be a complement to traditional equity and bond assets, providing further diversification, attractive returns, and a meaningful source of income in the current environment.