Best ideas across asset classes

Asset class outlooks

• Equities
• Fixed income
• Municipals
• Real estate
• Public & private real assets

Equities

Saira Malik

Best ideas

• Our highest-conviction investment idea continues to be dividend-growers, which tend to be high quality companies with strong free cash flow levels.
• This area also offers solid income and tends to be less susceptible to volatility.

Investment positioning

The bad news as we enter 2023: We expect the all-too-familiar headwinds of 2022 (persistent inflation, rising yields, hawkish central banks and a rocky geopolitical landscape) to drive volatility and uncertainty through the start of next year. We should continue to see pockets of strength across global equity markets on specific catalysts such as perceived dovish messaging from central banks or even a moderation of rate hikes, but the risks surrounding earnings, employment and contractionary manufacturing data lead us to believe we’re not yet out of the equity bear market.

As a possible bright spot, we believe inflation is moderating, which should provide some tailwinds for stocks in 2023. In particular, we favor dividend-growers, an area where relatively higher income can help offset price return volatility.

Geographically, we prefer U.S. stocks (especially large caps) relative to other markets, as they offer better opportunities for both defensive positioning and growth.

Across market sectors, we like health care as a relatively stable area and see opportunities in REITs, which offer a combination of solid fundamentals and attractive valuations. We also think the materials sector should benefit from easing inflation and energy should hold up well. We’re less favorable toward higher growth areas, including technology and communications services that are likely to struggle amid a “higher for longer” interest rate environment.

Fixed income

Anders Persson

Best ideas

• We favor higher quality areas of the market as well as diversified and flexible core plus mandates that can identify select higher-income investments.
• We’re also quite favorable toward preferred securities: The issuer base is in great fundamental shape and the sector is attractively valued.

Investment positioning

We think we are approaching the end of the current rate-hiking cycle in the U.S. and think a terminal rate might kick in sometime in the second quarter of 2023 (other central banks are likely to continue tightening as they are further behind the curve). As such, we’re growing more comfortable taking on some duration risk and think it makes sense to move closer to neutral (although not yet time to go long).

At the same time, we’re growing a bit more wary toward credit risk as recession indicators rise, which could cause some spread widening. We think corporate credit fundamentals remain solid and we’re not expecting a significant rise in defaults since most companies have been focusing on improving their balance sheets.

This leads us to focus on higher quality investments across sectors. We’re particularly favorable toward investment grade corporates and see opportunities in the higher quality segments of the high yield market. In contrast, we remain cautious toward emerging markets debt given the likely continued strength of the U.S. dollar and slower global growth.

In private credit markets, some deals are being delayed or shelved due to higher financing costs and some lenders have been conserving capital, which creates deal scarcity. But demand remains high for private credit among investors seeking long-term compelling yield potential.

Municipals

John Miller

Best ideas

• In the investment grade space, we see the best opportunities in select longer duration, high quality bonds that we think are deeply undervalued.
• In the high yield area, we see a number of idiosyncratic opportunities in areas such as transportation, health care and education.

Investment positioning

We believe the selloff in municipal bonds in 2022 has been driven almost entirely by macroeconomic factors (specifically rising rates and inflation) rather than fundamentals. As such, we think municipals should be overdue for a snapback.

Despite the decline in prices, municipal bond markets remain backed by strong fundamentals: Municipalities are enjoying solid revenue growth, and we’re seeing more credit upgrades than downgrades. Municipal fund flows have been negative, but we expect that will change once investors become more confident that Fed rate hikes are getting close to ending and inflation is moderating.

We see the best current opportunities in higher quality and longer duration municipal bonds, which we expect will lead the way when markets stabilize. Additionally, we see opportunities in the BBB and BB credit quality range where spreads have widened in spite of particularly strong fundamentals.

Real estate

Carly Tripp

Best ideas

• In addition to the below, we remain focused on “global cities” experiencing growing, educated and diverse populations with a particular focus on the health care, industrial and housing sectors.

Investment positioning

Headwinds for private real estate are rising, and we expect volatility will persist (and perhaps rise). Transaction activity has been slowing and liquidity is becoming more scarce. We think fundamentals remain sound and firmly believe in the long-term case for carefully sourced private real estate investments, but we also expect we’re entering a phase where slowing deal flow and challenged liquidity will be more important near-term drivers than fundamentals.

One approach to this more challenging environment is to focus on real estate debt over equity (partially due to lenders broadly expecting rates to eventually decline). Across debt markets, we see the best opportunities in the industrial sector and, to a lesser extent, housing.

We’re also seeing differentiated, compelling and idiosyncratic opportunities across geographies: In the U.S., we’re focused on specialized medical offices that benefit from an increasing move toward outpatient procedures; we like European suburban housing (specifically rentals) in areas enjoying growing industrialization; and in Asia we prefer investments such as Tokyo senior living facilities and Australian student housing benefiting from demographic trends.

Public & private real assets

Justin Ourso
Jay Rosenberg

Best ideas

• In public markets, our best ideas include North American regulated utilities and midstream energy with a focus on natural gas.
• In private markets, in addition to farmland, we remain focused on investments that align with climate transition, such as clean energy, renewable fuel sources and continued strong global demand for protein and healthy foods.

Investment positioning

Perhaps the highest-conviction collective view from the GIC is our preference for infrastructure investments, particularly public infrastructure. Regulated utility revenue tends to be relatively decoupled from the economy and can experience growth from rising capital costs and policies related to energy transition and the Inflation Reduction Act. We also like midstream energy and waste investments for their growth and inflation-hedging characteristics.

Private infrastructure should benefit from many of the same trends, and we are continuing to see attractive deals and solid investment opportunities. Due to the slowing economy and pricing delays compared to public markets, however, we are cautiously approaching underwriting assumptions and valuations. We prefer the clean energy and energy transition sectors.

Farmland is another promising area within private real assets, as it can do well amid elevated levels of inflation and the geopolitical pressures that are creating supply issues. We expect row crops across geographies to have a better-than-average year, and believe farmland will remain a solid inflation hedge.

We have a positive view toward public real estate, particularly amid the severe market reaction to rising interest rates and their relatively defensive cash flows. We favor companies with solid balance sheets that have more optionality and are less sensitive to rate moves and that have built foreseeable rental rate growth. We generally like shopping center, industrial and residential over office exposure.