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Best ideas across asset classes
Asset class outlooks
- U.S. large cap stocks, particularly growth companies that can expand operating profits and benefit from strong cash flows.
- Energy companies able to capitalize on supply/demand dynamics.
We are neutral toward equities. Given the number of risks (rising interest rates, tightening monetary policy, slowing economic growth and ongoing geopolitical woes), we don’t yet see an “all clear” sign.
We’re not neutral on everything, however. We prefer U.S. equities over non-U.S. developed and emerging markets, given the more defensive nature and better growth potential of U.S. stocks. For investors with greater near-term risk tolerance, we’d also put in a plug for Latin American equities, which offer solid relative value and good growth prospects.
We’re also focused on dividend growers. This area of the market should be relatively shielded from volatility and could see relative benefits from a rising-rates environment. From a style perspective, we see opportunities across both growth and value, depending on where we’re finding the best risk/reward tradeoffs. And our favorite sector is energy, which should get a boost from rising demand and supply limitations.
Private equity deal flow is slower than last year, but we continue to see pockets of opportunity, particularly in more defensive areas like health care.
- In the short term, we see value in leveraged loans, given solid fundamentals and aggressive rate hikes.
- Over the longer term, high yield offers impressive yield and strong credit fundamentals.
- We think both areas should withstand a growth slowdown and even a mild recession.
Taxable fixed income markets have been beaten up badly in the first half of the year. But we think most of the bad news has been priced in. Bond markets are forecasting an economic slowdown and possibly even a mild recession. If economic and inflation conditions don’t materially worsen, that should be good enough for bonds. We don’t need to see new catalysts; simply seeing some stability from here should be good enough for fixed income.
We advocate a shorter duration stance, but are moderating that position as yields continue to climb. Overall, we think credit risk looks like a better bet. Credit fundamentals are solid (especially in high yield), and we don’t expect to see a significant spike in defaults, even in a recession.
This is particularly the case for high yield. With yields averaging more than 8%, the sector is actually offering a high yield. And spreads have widened to the point that high yield is providing a potential “cushion.” Credit fundamentals look strong enough to survive an economic slowdown. Until/unless that happens, investors can benefit from clipping the current coupons.
Private credit markets may come under pressure, as they haven’t yet reacted to slower growth and higher inflation. But we see opportunities in areas with strong covenants and controls, such as middle market loans.
- From a national perspective, we see the best value in long duration, low coupon, high quality bonds in California and New York.
- We are also focused on project-specific high yield bonds in the transportation and retail sectors.
Municipal bonds were unfairly punished in the first half of the year. The selloff resulted from broad macro issues (chiefly rising rates) rather than fundamental factors, which remain strong. State and local tax revenues look healthy, reserve funds and pension balances are solid and most sectors are seeing positive ratings upgrades.
Both investment grade and high yield municipal bonds offer compelling value. If interest rates stabilize, we believe municipals could be poised for a jump in the second half of 2022.
We think it makes sense to take on both duration and credit risk to seek out compelling yields and total return. The municipal yield curve is steeper than the Treasury curve, and lower-rated credits present opportunities due to fundamentals and discounted prices.
In general, we prefer bonds backed by property taxes and see value in the energy and electricity generation sectors.
- We are focused on defensive areas of the market backed by strong structural trends, such as rental housing and senior living in the U.S., student housing in Europe and Australia and discount outlet malls in China.
The case for private real estate hasn’t changed, but we acknowledge near-term risks are growing. Real estate has had a phenomenal run the last few years, and has only priced in the effects of higher inflation and monetary policy tightening to a limited extent.
Our key investment theme today is that we suggest overweighting new dollars to real estate debt over equity. With rates and spreads climbing, the return outlook remains strong, and we think debt markets may outperform real estate equity in the near term.
From a sector perspective, we like for-rent housing, as the cost to own has increased drastically this year. We emphasize affordable housing throughout the U.S. Health care-related real estate also looks compelling, given its essential-service nature and because it represents a growing proportion of global economic output.
Our theme of focusing on “global cities” remains intact, as we think select cities are demographically and structurally more attractive. For example, while the office space outlook is uncertain, office buildings in Miami’s city center are attracting historically high rents despite market volatility.
Public & Private Real Assets
- In public real estate, we are positive on residential, senior housing and industrial real estate, while in public infrastructure we like waste and energy-related infrastructure.
- Across private real assets, we favor investments that align with climate transition, such as carbon sequestration, clean energy, renewable fuel sources and continued strong global demand for healthy foods.
We prefer more defensive positioning across real assets. Slowing global economic growth and worsening sentiment could represent headwinds for more cyclical areas. Additionally, we believe that the lagged effects of higher inflation and interest rate increases have not yet been fully priced into private markets.
We are neutral toward public real estate, but price declines have created pockets of opportunity. Industrial real estate exhibits attractive fundamentals, and we think the downturn there has been overdone. We also like senior living, since this sector’s recovery has lagged and it should benefit from long-term demographic trends.
Public infrastructure offers broader opportunities. Regulated utilities in the U.S. should hold up well in an environment of slowing economic growth. And waste-related infrastructure has the pricing power to pass along increased inflation-related costs to customers.
We have a more cautious view toward private real assets, in particular infrastructure, based on public markets repricing ahead of private revaluations. However, sound investment opportunities remain, especially those that can pass through price increases. Examples include farmland and agribusinesses benefiting from rising food prices, timber investments capitalizing on growing demand for housing, and infrastructure investments with pricing power.
Renewable energy and energy transition investments within private real assets should continue to see short- and long-term tailwinds. In the short term, we prefer solar and offshore wind generation globally. We also see opportunity in low carbon transportation fuels, particularly renewable diesel in the form of oilseed markets.
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. 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. 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.
Important information 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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