Real Assets Insights: Q1 2025 Real Assets Start the Year Strong

Real assets strategy advanced during the first quarter, supported by rising inflation expectations and falling yields. Real assets are poised to benefit from tariff induced inflation, secular tailwind, and geopolitical uncertainty.

Global economic activity navigated a complex landscape in the first quarter of 2025. While activity showed resilience early in the quarter, supported by improving manufacturing and offset by easing services, the overall momentum faced headwinds. The job market remained robust initially. Inflation trends diverged, with US core inflation decreasing in January, while the eurozone saw acceleration early on. US trade policy dominated headlines, resulting in uncertainty. Tariff announcements had an impact on Canada, Mexico, and China, although initial implementation was postponed.

Quarter in Review

Geopolitical risks escalated during the quarter. Starting early February, a 10% tariff on Chinese goods triggered countermeasures from China – export restrictions on vital minerals and tariffs on US products. Proposed 25% tariffs on Canada and Mexico were announced but subsequently delayed. Trade friction and the potential for retaliatory tariffs continued to significantly burden global markets. In Europe, the incoming German government’s announcement of a large fiscal stimulus plan, including changes to fiscal rules and plans for major infrastructure projects, was a significant development. Complementing this, the European Commission proposed higher defense spending for the European Union (EU), pointing at a changed geopolitical outlook.

Central banks continued to adjust policy. In January, while the Bank of Japan increased interest rates, the Bank of Canada eased its rate-cutting pace, and the European Central Bank made multiple 25 basis point cuts. Market expectations solidified around rate cuts by the US Federal Reserve (Fed) later in 2025, despite the Fed holding steady in March, as US growth momentum showed signs of slowing late in the quarter.

Over the quarter, US Treasuries saw positive returns amid rising recession risks, outperforming European sovereigns, which faced pressure from potential new issuance. The 2-Year US Treasury yield fell 35 bp to under 3.90% and ended the quarter near its lowest levels since October. The 10-Year US Treasury also fell over 35 bp to around 4.20%. The dollar index was down 4%, while commodities posted gains through the first few months and was the top-performing asset class for the quarter, significantly boosted by rising gold prices. Markets originally supported the idea that tariff threats will help drive better trade deals. However, that narrative fizzled in March as US President Donald Trump announced April 2 as ‘Liberation Day’, a day when reciprocal tariffs on trading partners will be announced.

Despite core inflation falling, the risk of sticky or even increasing inflation in later months was present at the start of the year. The real assets strategy had positive returns for each month in the first quarter, and every asset class posted gains overall despite some bumpiness. The strategy was up 6.18%, slightly better than the composite benchmark, which was up 6.14%. The difference primarily came from global infrastructure stocks that benefited from the tax treatment of dividends for US investors relative to the index. 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 basis points annually and has provided an annual return just over 4.2%.

Commodities (as measured by the Bloomberg Commodities Roll Select Total Return Index) recorded a 9.16% gain for the quarter, making commodities the best-performing asset class. Factors such as new tariffs, global economic growth concerns, OPEC+ production decisions, and weaker dollar influenced commodity prices. Sector-wise, precious and industrial metals led the gains, while energy posted modest returns. The agriculture sector delivered a small gain, with broad losses in grains partially offset by positive performance in softs and livestock.

The energy sector surged by 11.0%, driven by natural gas, with the Bloomberg Natural Gas Sub-Index rising over 31% in the quarter due to chilly weather, supply disruptions, and increased global demand. On the other hand, the West Texas Intermediate crude oil index recorded a modest return of 2.1%, as concerns over economic outlook and global oil demand and supply intensified, amid escalating trade tensions and an OPEC+ decision to begin unwinding production cuts in April. The International Energy Agency revised its 2025 oil demand growth forecast down by 70k bpd to around 1 million bpd, with growth primarily attributed to Asia, and in particular China.

The industrial metals complex experienced an 8.6% rise, driven by copper. Copper prices saw a significant jump of over 25% amid concerns over potential tariffs. Improved sentiment regarding China’s economy, a major consumer of the metal, also contributed to the price increase. Nickel (+3.4%) and aluminum (+0.1%) showed more moderate gains, while zinc prices fell by 4.4% during the quarter. The precious metals sub-index registered robust gains, up 18.3%, with both gold (+18.2%) and silver (+18.5%) showing strong gains, driven by heightened geopolitical uncertainty and trade tensions that boosted their appeal as safe-haven assets. Increased central bank purchases also contributed to gold’s price surge.

The agricultural sector posted a modest 2.0% return, as strong gains in soft commodities were offset by weaker grains. Grain prices, including that of soybeans, corn, and wheat, declined during the quarter due to weak export demand, macroeconomic uncertainties, and favorable weather conditions that put pressure on price. On the other hand, coffee price surged significantly, with the Bloomberg Coffee Subindex climbing over 22%. This rise was driven by expectations of reduced harvests in Brazil and Vietnam – two of the largest producers – due to adverse weather, alongside growing global coffee demand.

Global natural resources was the second best-performing asset class, led by energy companies that are integrated across all aspects of oil and gas exploration and production. With supply disruptions and cold weather leading to higher demand for natural gas, the companies in this sector benefited, seeing returns of over 11%. Coal companies lost ground during the quarter. Companies involved in the mining of precious metals also helped to lead the index higher for the quarter. With geopolitical uncertainty, central bank buying, and lower yields, the demand for the precious metal helped to lift related companies. Even the Agriculture related companies saw higher levels for the first quarter – chemicals pulled higher slightly offset by losses in food, paper, and forest products. Overall, the S&P Global LargeMidCap Natural Resources Index rose 8.2% for the quarter.

Infrastructure equities also performed notably well this quarter, with similar patterns as other indices – companies involved with energy and utilities had the highest average returns. The component that had the largest contribution given its weight and return was utilities. Oil and gas storage also exhibited great performance during the first quarter of the year. Declining interest rates was beneficial to infrastructure stocks. The S&P Global Infrastructure Index was up each month of the quarter, culminating in a gain of 4.4%.

REITs, an interest rate sensitive asset class, was positive, supported by declining Treasury yields and a strong earnings season. The Dow Jones U.S. Select REIT Index returned 1.7%. Within the property sector, healthcare, industrial, and residential REITs advanced, while data centers, lodging/resorts, and office REITs lagged all other sectors

In March, US TIPS outperformed comparator Treasuries by 0.28%. The full TIPS Index (Barclays Series-B) returned 0.53% and 1-10 year returned 0.97%, while comparator Treasury indices returned 0.25% and 0.5%, respectively. In Q1 2025, TIPS outperformed comparator Treasuries by 1.11% for the period. The full TIPS Index (Barclays Series-B) returned 4.16% and the 1-10 year returned 3.93%, while comparator Treasury indices returned 3.05% and 2.72%, respectively. US CPI inflation data released in March surprised to the downside, with headline inflation rising by 2.8% (versus 3% expected), while core inflation rose by 3.1% (versus 3.3% expected).

Investment Outlook

Expectations for commodities are positive in the near term, but the asset class may experience divergence in subsectors. We have an optimistic outlook for precious metals. The main forces that drove prices higher are still active and recent market risks may keep upward pressure on the precious metals. Geopolitical risks have helped to buoy the demand for gold as central banks continue to diversify holdings. The rate of purchasing has slowed, but central banks are still making purchases in a similar range of the last few years. Strong gold ETF inflows have boosted demand for physical gold, which in turn boost underlying prices. We are seeing a lot of uncertainty and volatility in the financial markets, an environment that gold tends to do well in as a safe haven asset. Other reasons why the outlook for gold is positive are related to the potential de-dollarization trend and increased demand out of China. We expect silver to also benefit from the uncertainties and the ongoing energy transition.

We are cautiously optimistic on industrial metals but overall think risks tilt toward the downside. The reason metal prices could move higher is strong supply and demand fundamentals. Manufacturing activity seems to have bottomed and is starting to improve in Europe and China. Sentiment has risen for China, which remains committed to supporting consumption and growth through stimulus, and construction spending should remain firm. The possibility of the US continuing to stockpile copper ahead of potential tariffs, which could reduce supply outside the US, should keep prices up.

Some of the risks are due to price movements we have already seen. Given the jump in prices already, it is possible prices have come too far. Also, while tariffs are supportive of prices, as deals are negotiated or even resolutions rumored, prices could swing the other way. Lastly, the positions of many industrial metals already seem extended when compared to historical standards. However, the longer-term thematic is still supportive and metals could benefit from clarity on trade policy, which would remove a downside risk to growth and sentiment.

Our view on energy is cautious. WTI crude prices have already fallen to where we have not been in four years and ironically can provide some support, limiting downside risk. Also, demand itself should remain resilient, which is supportive, and the US is likely to start filling the Strategic Petroleum Reserve. Our expectation for natural gas remains positive and may lift the entire energy asset class. If we get clarity on trade, along with lower yields and pro-growth policies (deregulation/taxes), sentiment could be boosted, which would be positive for energy.

On the risk side, the OPEC+ decision to raise production may weigh on oil. A potential trade war and slowing economic growth also tilt the view more negatively as demand may slow.

Despite agriculture having performed well for the start of the year, we are negative on the sub-sector. Some grains touched their peaks earlier this year and with surplus and competition, we are not seeing much upside.

Overall, we are positive on commodities in the near term, especially if tariffs were to push prices higher without causing a slowdown in the economy.

Natural resource equities struggled as economic growth and demand concerns weighed on commodities and natural resources. Looking forward, natural resource equities could benefit from improved sentiment as we appear past peak tariff fear and could receive more pro-US growth policies in the summer. Valuations remain attractive and natural resources would benefit from any upside inflation risks and further stimulus in China. The secular AI thematic should continue to benefit some integrated oil and gas companies.

Global infrastructure equities should benefit from their defensive characteristics and a further decline in yields. Additionally, the renewed push for onshoring and pro-US growth policies that could follow this summer are a tailwind. The AI and energy transition tailwinds remain intact, while the utilities sector within infrastructure equities could benefit from investors looking to get shelter from tariff impact. While there are risks to the upside for bond yields, valuations remain attractive with price-to-earnings below the 10-year average and current price-to-cash flow still reasonable.

Public REITs are more sheltered from tariff impact due to their business model, which generates income from existing and high-quality leases. The tailwind from AI (data center demand), the potential for further Fed rate cuts, and defensive sectors like healthcare can buoy REITs. Despite the support, REITs have been very rate sensitive, and while we do anticipate further Fed cuts, there are still upside risks to yields and some sector-specific risks, like for the office sector, that weigh on our outlook.

Real yields remain attractive, and TIPS could benefit if yields continue to fall on tariff uncertainty and slowing economic data. Additionally, prices are likely to rise in the coming months, which supports TIPS. However, break even rates remain elevated and TIPS are susceptible to volatility, which should remain high, given concerns about the US deficit and diversification away from US assets. Overall, TIPS are less attractive on a relative basis.

Inflation and Real Assets

Peak tariff uncertainty appears to be over, but we still lack true clarity. We believe that April 2 was the opening salvo for negotiations and that tariffs are not sustainable, so they are not the end goal. As for what sticks around, the 10% universal tariff is likely to remain permanent to help with trade imbalances. Sectoral tariffs on steel, aluminum, and autos are also likely to remain permanent to address national security. The reciprocal tariffs seem the most vulnerable to negotiation through trade deals that could involve further capital investment in the US or agreements to buy US energy. China will probably face increased pressure from the US and is likely the key focus going forward.

What does this mean for prices? Given the uncertainty and how quickly things change, it is difficult to forecast, but we do expect tariffs to increase inflation and keep the Fed on track for three 25 bp cuts in 2025. Additionally, there are other potential factors, some of which have been increasing in intensity prior to the tariffs, that could keep upward pressure on prices and may be exacerbated by the trade situation.

Food prices, as measured by the FAO Food Price Index, which have been rising since June 2023, continue to push higher (Figure 4). Used car prices, as measured by the Manheim Index, fell slightly in March, but had been trending higher since May of last year and could possibly turn higher. Auto tariffs were softened recently, but automakers could be forced to raise prices if their margins get squeezed. The question then could be: would automakers raise prices just of the impacted vehicles, or across their entire lineup to minimize the impact?

To keep costs down, companies have reduced spending and have tried to front run inventory, but companies including Walmart and Home Depot have warned that higher prices will be hard to avoid. The prices paid components of PMIs and small business plans suggest greater price pressures ahead. First, the prices index within the manufacturing PMI jumped to 69.8, a level last seen in June 2022. While the services PMI prices component fell to 60.9 but remains elevated and has generally trended higher. Second, the percent of firms planning to raise prices in the next three months has increased further with NFIB Small Business Survey at its highest since the beginning of 2024 and above pre-Covid levels.

Unless there are significant job losses or high reciprocal tariffs last an extended period of time, the US should avoid a recession. During President Trump’s first time in the White House, we received tax cuts before tariffs, which helped ease concerns about the potential negative impacts. This time, policy has taken a different approach with DOGE and tariffs prioritized, which has soured sentiment. However, pro-US growth policies like deregulation and the extension of tax cuts, with the potential for further tax relief, should happen later in the year and support demand, which could keep pressure on prices.

Consumer confidence and survey data have weakened, but hard data still points to a soft landing. Jobless claims are not alarming, quits have been increasing, and net worth as a percent of disposable income remains very high while debt service as a percent of disposable income remains below pre-Covid levels. With the consumer on good footing, low levels of layoffs, the Fed expected to reduce rates, and increasing money supply, demand could weather the storm and surprise to the upside (Figure 5). Mixed with the potential for supply to decline as uncertainty forces companies to hold off on spending and products get diverted away from the US, price increases could challenge portfolio returns.

How Can Investors Prepare Their Portfolios?

An allocation to real assets can help mitigate the impact of inflation, expected and unexpected, while potentially minimizing the impact of tariffs.

The impact of tariffs is complex, with uncertainty around the magnitude, scope, and duration of final implementation. Broad-based tariffs could increase costs for most areas of the economy and weigh on economic growth. However, the impact on commodity prices is cloudy. On one hand, weaker growth, especially in China, would dent demand and reduce prices for many commodities and we have seen that recently. On the other, commodities, including copper, which could get hit with tariffs, could see US prices move higher as buyers hoard supply near-term in anticipation of the tariffs.

Further, the focus on re-shoring becoming less dependent on imports, a trend that has been in motion, should continue with further buildup of manufacturing capacity, which should support some commodities. Overall, the uncertainty alone could pressure commodity prices, but there are also some potential tailwinds. Outside of commodities, REITs and infrastructure could hold up well due to less exposure to impact from tariffs compared to other assets. REITS generate most of their revenue from pre-existing US assets that would not be hurt as much by lower trade and higher costs. The utilities sector within infrastructure exhibits less sensitivity to economic growth, since power is a necessity and the utilities are able to pass along higher costs. Lastly, the defensive nature of infrastructure equities could make them attractive in this time of uncertainty.

Given the uncertainty, it is not unreasonable to think prices could rise further than anticipated. Portfolios with large allocations to traditional equities and bonds could be vulnerable to any upside inflation surprises, similar to what we witnessed in 2022. The best way to protect a portfolio would be to increase the allocation to real assets, which have historically performed well during periods when inflation outpaces expectations. We illustrate the performance of various asset classes during different inflation surprise regimes. The first three quintiles are when actual inflation printed below expectations, an environment that has been good for traditional assets. The last two quintiles are periods where actual inflation exceeded expectations, and real assets have generally outperformed (Figure 6).

Real Assets Strategy

At State Street Global Advisors, 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.