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2023 GIC outlook: Peaks and valleys
Views from the Global Investment Committee
- Peaks and valleys
- Portfolio construction themes and our highest-conviction views
- The economy and markets
- Our best investment ideas
Key takeaways
- Inflation and pressure from interest rate hikes are likely to ease in 2023, but recession risks are growing. Our base case is for a mild recession in the U.S., but a worse environment in Europe.
- We believe investors should focus on non-cyclical asset classes and investments that are less correlated with economic growth.
- Additionally, we suggest modestly extending duration and carefully assessing the balance between public and private markets given the sharp public markets selloff.
Navigating the rocky market landscape
Saira Malik, Chief Investment Officer
Entering the fourth quarter of 2022, our outlook acknowledged a hard truth for investors nursing wounds from the steep market downturn: We’re not out of the woods yet. That theme still holds, but the contours of the investment landscape have evolved. One primary obstacle — stubbornly elevated inflation — looks a little less imposing, while another — a projected recession affecting countries around the globe — has been brought into sharper relief.
In the U.S., we think inflation peaked in October, with both headline and core CPI readings showing significant year-over-year declines. This was the data investors had long been waiting for, and they expressed their approval by sparking outsized relief rallies. This initial descent from the inflation summit is welcome, but it takes more than one data point to make a trend. And even a downhill climb can have its treacherous moments.
Meanwhile, the second main obstacle — a recession widely seen as inevitable — looms as large as ever. The shift from inflation risk to recession risk reflects the impact of aggressive monetary tightening by the world’s central banks, which have fixated on inflation-fighting at the expense of economic growth. Even with inflation starting to moderate (at least in the U.S.), there is no guarantee that central bank policy rates will follow suit. In fact, in November, Fed Chair Jerome Powell conveyed that rates are likely to remain “higher for longer” — posing continued challenges to the economy and investment markets.
Which asset allocation decisions may be best suited to this shifting backdrop? We suggest emphasizing these central themes:
- Adopt a less cyclical stance. The increased likelihood of a recession, and the price deflation that would accompany it, poses a risk to already challenged corporate revenue growth. In equities, this makes us more cautious toward cyclical areas, while favoring quality, dividend growth and public infrastructure.
- Strengthen core bond holdings. After an atypical year in which bonds failed to provide meaningful diversification benefits or ballast to portfolios, we think conditions now warrant a modest increase in duration through higher-quality investment grade credit and municipal bonds.
- Carefully assess public vs. private allocations. While most public markets were broadly and deeply negative in 2022, private markets were relatively insulated from the turmoil. As a result, some investors may feel they have a potential portfolio imbalance between the two. Ultimately, the right balance between publics and privates will vary depending on investor needs and portfolio objectives. But we see differentiation across and within asset classes. Among private assets, we are highly constructive on private credit, given its defensive nature and strong fundamentals. And we also like farmland as an inflation hedge. We are seeing some growing near-term risks in areas of private real estate, while finding solid opportunities in public REITs.
On balance, the economic and market landscape in 2023 may look slightly different than it did in 2022, but investors should continue to anticipate some rough and occasionally unforgiving terrain. We invite you to read on for our perspective on opportunities to make the trek ahead.
As Nuveen’s CIO and leader of our Global Investment Committee, Saira drives market and investment insights, delivers client asset allocation views and brings together the firm’s most senior investment leaders to deliver our best thinking and actionable investment ideas. In addition, she chairs Nuveen’s Equities Investment Council and is a portfolio manager for several key investment strategies.
Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.
Nuveen provides investment advisory services through its investment specialists.
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.
Nuveen provides investment advisory services through its investment specialists.
