Best ideas across asset classes

Asset class outlooks

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

Equities

Saira Malik

Best ideas

• Dividend-growers tend to be high quality companies with strong free cash flow levels and offer the added benefits of income generation and lower relative volatility compared to the broader market.

Investment positioning

The 2022 headwinds that punished equities (persistent inflation, rising rates, geopolitical turmoil and recession fears) remain a force, but continue to shift and vary in magnitude. Investors have grown increasingly resigned to a fate of “higher-for-longer” interest rates—a theme central banks have been expressing for several quarters. We anticipate continued volatility and uncertainty, and this mixed environment leads us to favor a barbell approach when it comes to equity risk allocations.

We prefer an overall defensive stance across global equity markets, and favor investments with solid free cash flow, enough pricing power to help offset inflation and those with the ability to grow dividends while remaining predominantly agnostic of style, market cap or sector. Select industries, such as semiconductors and software, may be well suited for this unique environment given a degree of demand inelasticity and their historical ability to operate with tight margins.

To balance this positioning, we would look to emerging markets equities as an attractive option to take on more risk and gain some beta exposure. A weaker U.S. dollar, attractive valuations, improving earnings estimates and the reopening of China should all provide tailwinds.

Even before recent events, we were wary of the banking industry, and still expect additional volatility. We see select opportunities in some financials (particularly large, globally diversified companies), but remain cautious toward the sector as a whole.

Global small caps appear undervalued and are beneficiaries of easing inflationary pressures. While experience demonstrates the asset class’s propensity to underperform heading into an economic slowdown, small caps are typically among the earliest areas of the stock market to recover from an economic downturn.

Fixed income

Anders Persson

Best ideas

• With credit spreads potentially vulnerable in the near term, our highest conviction views are to focus on mid- to high quality areas of the high yield and loans markets, as well as on preferred securities.

Investment positioning

Despite the banking turmoil, conditions have improved for fixed income markets since the end of last year: credit fundamentals look healthy, inflation is moderating and global economic growth remains solid. Valuations have adjusted considerably and are now closer to fair value levels, though medium-to-longer-term income generation opportunities still appear robust.

Our key investment themes are to emphasize credit risk over duration risk and to focus on flexibility and diversification across credit sectors versus over- or under-allocating to any one area. 

Within that context, however, we recognize that investment grade fixed income has had a strong run. While we continue to see pockets of opportunity, that area of the market as a whole appears fully valued.

Across other areas of the market, we are slightly more positive toward emerging markets debt as economic stability increases. We also think senior loans offer compelling yields and we continue to see value in high yield bonds — especially in the higher credit quality areas. Additionally, we like select names in preferred securities thanks to attractive valuations.

Municipals

Best ideas

• In the investment grade space, we see the best opportunities in select longer duration, high quality bonds that continue to offer value.
• The high yield area offers a number of idiosyncratic opportunities in areas such as specialty transportation.

Investment positioning

The sharp and painful decline across municipal bonds finally turned the corner at the end of 2022. The asset class has since enjoyed a strong snapback, and investor inflows returned with a vengeance. In retrospect, the selloff was clearly based more on sentiment and technicals (e.g., inflation fears and rising rates) than fundamentals. Nevertheless, investors should expect ongoing volatility in municipal markets.

We see continued value in taking on some duration risk in municipal bonds. Fundamentals remain sound and credit quality looks healthy. Given the strong January rally in municipals, some relative value has been taken out of the market, particularly on the investment grade side within short to intermediate maturity ranges. 

At present, we’re seeing the best value in lower coupon (around 3%), longer duration, high quality municipal bonds backed by essential service sectors. These areas of the market offer attractive yields, relatively wider credit spreads and appear very well positioned to withstand a recession or economic slowdown.

Real estate

Carly Tripp

Best ideas

• In addition to the above, 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

While property-level fundamentals remain strong within the areas of our primary focus (housing, industrial and alternatives), private real estate markets continue to experience headwinds associated with macroeconomic volatility and uncertainty. As a result, deal activity remains subdued and access to liquidity is limited. While we are seeing some market activity return, many investors expect private real estate valuations to lag public markets, which have returned a portion of the losses experienced in 2022.

In this environment, we continue to favor real estate debt over equity, as yields today are higher than cap rates in many circumstances. Within this area, we prefer structured and high-yield debt investments.

We also continue to see idiosyncratic opportunities across geographies: in the U.S., we like specialized medical offices that benefit from aging demographics and an increasing move toward outpatient procedures; we favor 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 industrial real estate and investments that should benefit from improved Chinese economic growth and reopening, such as Hong Kong real estate.
• We also favor defensive investments such as regulated utilities and waste companies.
• In private markets, we continue to focus 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

Heading into 2023, we emphasized opportunities in public infrastructure investments as an area that could perform well when interest rates rise and economic growth slows. The investment thesis for listed infrastructure still holds. We particularly favor U.S. regulated utilities and waste companies, and see risks abating somewhat across European infrastructure, particularly in utilities and transportation.

Public real estate markets faced notable underperformance in 2022 and look attractive. We see solid opportunities in the asset class, particularly in the industrial, strip retail and select net lease segments. We are less favorable toward the office sector, which continues to struggle.

Private infrastructure investments should benefit from many of the same trends that their public counterparts enjoy. We emphasize investments that benefit from the continuing global energy transition from fossil fuels to electrification and clean energy generation.

Across other private real assets, we see value in agribusiness companies, particularly those focused on protein sectors and food ingredients for both human and pet food consumption, and also favor timberland investments that should benefit from increased housing demand. We continue to like farmland investments (especially row crops), but we expect the pace of farmland price appreciation to slow from the elevated levels seen in 2021 and 2022.