Question #16

An asset suitable as a consumption hedge is one which performs relatively better in recessionary conditions than other asset classes. Equities in general are cyclical, and would be expected to perform poorly in weak economic conditions. Real estate can be considered to have both bond-like properties in that there is a predictable stream of cash flows, and equity-like properties in the uncertainty of the future value of the property. The equity-like element of real estate investments makes them unsuitable as a consumption hedge. Growth stocks (high P/E, low dividend yields) tend to be in immature markets with high growth prospects. Value stocks (low P/E, high dividend yields, stable earnings) are commonly in established markets. A value strategy tends to perform well in recessionary conditions, while a growth strategy is more suitable for economic expansions.