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Asset allocation views as the market adjusts
2020 Second quarter asset allocation views
While much has changed over the past month, our expectation of a “low for long” interest rate environment and elevated volatility remain. Because it is impossible to time a market bottom, investors must remain nimble, identifying opportunities for relative value while avoiding “value traps.” Due to de-leveraging and liquidity pressures, we suggest re-risking in stages via equities, favoring defensive large cap growth and emerging markets, as well as defensively oriented real assets.
The tactical views below represent our views on return potential over the next 12 months based on relative risk values across all asset classes. They present tactical opportunities for actively traded, multi-asset portfolios and do not represent a specific portfolio or model. Nuveen’s investment teams continue to identify opportunities within each of their asset classes while striving to remain fully invested.
|As of Apr 13 2020|
Central bank stimulus should cap rates and limit liquidity-driven spread widening; solvency risks still elevated
Earnings uncertainty and heightened volatility amid pockets of value and policy support suggest staying the course
Lower beta and cyclicality relative to developed international; significant monetary and fiscal policy support
More defensive equity exposure, given lower leverage and less cyclical sector composition. Secular trend to continue.
Declining consumer demand weighs on industrials and energy; could be slightly offset, as policy support steepened the yield curve
Weaker balance sheets and earnings pressures against low operating margins relative to larger capitalization
|Large cap growth|
|Large cap value|
Value orientation will slow recovery; U.S. policies should weaken the dollar and challenge export-oriented economies
Relative value has evaporated with coronavirus and Brexit planning; energy exposure presents a challenge
Value orientation means cyclicality; less monetary and fiscal policy options to counter coronavirus economic effects; potentially stronger Euro
Lower coronavirus infections than US and Europe with attractive valuation and stimulus; Olympics postponement removes a growth catalyst. Higher Yen will weigh on export sector
Higher beta, commodity driven, elevated levels of private debt, lofty home prices and accelerated unemployment from the virus shock; central banks are easing from a low starting point
Further along with coronavirus and less pronounced downward earnings revisions make this a potential re-risk candidate; our preference depends on a depreciating U.S. dollar and declining real rates
Emerging Asia less vulnerable due to current account surpluses, generally are energy importers and further ahead with coronavirus response; commodity export-driven countries in Latin America and Russia likely to struggle under budget pressure; views are tempered by attractive valuations already pricing commodity headwinds
|U.S. fixed income|
|Short-term (0 to 5 years)||
Fed quantitative easing caps yields across the curve; longer-dated bond yields less attractive given the incremental risk
Despite limited carry opportunity, relative correlation profile means cash provides utility; liquidity is key
Conservative opportunity to re-risk given extensive fiscal and monetary stimulus; medium-term value given depressed inflationary expectations
Higher corporate leverage, additional earnings pressure and spread widening, slightly offset by duration and the Fed
Higher energy allocation and deteriorating fundamentals; Fed actions support spreads but not potential business risks
Limited CLO issuance and low rates weigh on technicals; increasing defaults and reduced expected recovery rates
Valuations have improved, but downside risks relative to BBB with limited spillover from policy stimulus
Offer better value versus Treasuries, particularly agency MBS and ABS due to policy support; limited prepayment risk is more than compensated
Attractive on a pre- and post-tax basis; prefer higher quality; direct fiscal support to state and local governments could ease tax receipt strain; within Fed's scope
Liquidity concerns, credit risk and continued outflows; select opportunities may be available
|Treasuries (7 to 10 years)|
|Investment grade corporates|
|High yield corporates|
|Investment grade municipals|
|High yield municipals|
|Non-U.S. fixed income|
Japanese Government Bonds (JGBs) and German Bunds should continue to trade sideways and in line with U.S. Treasuries, as much of the global convergence in yields has already occurred and stimulus continues to work through the system
Attractive risk-adjusted carry relative to comparable U.S. spread risk with greater dispersion of returns; benefit from a depreciating USD and easier financial conditions
More conviction in G10 upside vs. USD than EM; prefer to own hard currency EM bonds on risk-adjusted basis
|Emerging markets debt hard|
|Emerging markets debt local|
|Alternative asset classes|
Defensive aspects challenged by coronavirus mitigation strategies, particularly commercial real estate, but we expect rates to remain capped. Sector dispersion is high; large opportunity for active management.
Asset repricing concerns, particularly in hotels and retail; still providing stable income and lower correlation to equities
Negligible price appreciation expected given lagged nature to public markets, balanced with income stability
Low agricultural commodity prices a headwind, but existing leases protect current income. Crops related to discretionary spend may be pressured, while food staples crops advance.
Previous high-multiple deals being re-marked with less financing available; small cap exposure with limited policy support; exit strategies postponed and potentially at lower valuations
Prefer to be higher in capital structure within the illiquid/private complex, but solvency remains a key risk
Demand destruction from coronavirus crisis likely to far outweigh OPEC+ production cuts
Global low real yields, a weaker U.S. dollar and globally coordinated monetary stimulus providing diversification
Traditional defensive properties challenged by coronavirus mitigation; built-in inflation protection attractive for our medium term view; potential infrastructure spending bill could be a tailwind
Significant oil sell-off, supply/demand issues and structural market change continue to pressure pricing; attractive dividend yield and valuation
|U.S core real estate|
|U.S. real estate mortgages|
|Private credit (middle-market loans)|
|Oil (WTI) and growth metal|
Tug of war between demand for U.S. dollar liquidity and managing global financial conditions to heal economies. US short rates have fallen relative to G10, the greenback is overvalued relative to most G10 currencies, significant twin deficits and carry trade unwind to support EUR and JPY
EM central banks must balance capital outflows with low growth backdrop; limited near term inflation reduces some pressure
Developed market commodity-driven economies will face headwinds; high leverage with global economic recession to exacerbate
|CNY (Chinese Yuan)|
Key indicators to watch
Lagging economic information presents great challenges during periods of heightened volatility, particularly when catalyzed by an exogenous global supply and demand shock. Consequently, for longer term directional positions we strongly favor re-risking in stages to reduce market timing risk. For shorter term tactical ideas, we favor expressing them in relative value terms. Both strategic and tactical require a constant evaluation of new information as it unfolds.
These are the main areas we’re watching:
Virus pressures. The coronavirus pandemic and related mitigation strategies are the root cause of economic and market risks. Until we see clarity around the evolution, response, and therapeutic developments we can’t begin to ascertain the ultimate economic impact.
Economic indicators. While many economic indicators are lagging by nature, we’ll be focusing on faster moving soft data like Purchasing Manager Indices (PMIs), consumer and business sentiment, jobless claims, and financial conditions. While the extent of virus spread and response function will differ by country and region, China’s data and Southeast Asian supply linkages may provide context for how the impact will evolve in the rest of the world.
Stimulus and policy support. This is the key determinant for short term market behavior. Markets are rewarding fiscal stimulus more than monetary policy thus far, largely because it can be more targeted. However, monetary policy is necessary for ensuring proper market functioning. Most largely affected countries have deployed meaningful fiscal stimulus, generally supporting large industries and small businesses, providing unemployment support and bolstering the health care system. These measures are necessary to help reduce economic fallout, but current uncertainty means additional stimulus will likely be required.
Cross asset behavior. We’ll look for the level of implied volatilities to normalize, the term structure of volatility to regain a more typical upward slope and correlations around risk-on/risk-off exposures to begin reestablishing themselves. Sustained cyclical leadership would be a positive development. Narrowing credit spreads will bode well, as spreads tend to peak prior to equity market bottoming. Massive liquidity-induced market dislocations appear to have abated, particularly where the Fed is directly intervening, but solvency risks are still a concern.
3 Diversification does not assure a profit or protect against loss.
A hedge is a type of derivative, or a financial instrument, that derives its value from an underlying asset. Hedging is a way for a company to minimize or eliminate foreign exchange risk.
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. Past performance is no guarantee of 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.
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. Foreign 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 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 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. 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 suitable 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 asset classes are 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.
Featuring portfolio management by Nuveen Asset Management, LLC, an affiliate of Nuveen, LLC.