Best ideas across asset classes
Asset class outlooks
- 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.
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.
- 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.
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.
- 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.
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.
- 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.
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
- 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.
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.
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.
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