Best ideas across asset classes

Asset class outlooks

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

Equities

Saira Malik

Best ideas

• Our highest-conviction investment idea continues to be dividend-growers, which tend to be high quality companies that have strong free cash flow levels.
• This area of the market also offers solid income and tends to be less susceptible to volatility.

Investment positioning

We remain neutral overall toward equities as markets continue to face headwinds — even as those winds are shifting. Inflation remains elevated but is starting to moderate, while interest rates appear to have stabilized at a relatively high level. Today, we are increasingly focused on the prospects for a recession and have concerns about some companies’ abilities to maintain pricing power, which could challenge revenues and earnings. In this environment, we expect continued volatility and uncertainty, and we favor overall defensive positioning combined with select risk-taking.

Specifically, we think U.S. large cap equities remain a relative safe haven and believe large/mega cap technology companies (the main market driver this year) look relatively well positioned for disinflation and slowing growth. Emerging markets have become more attractive due to compelling valuations, solid earnings prospects and the joint tailwinds of a weaker U.S. dollar and easier monetary policy in China. We remain cautious toward U.S. small caps, as we expect this area may underperform ahead of a recession.

Across geographies and sectors, we are looking for ways to shift from a more defensive posture toward higher-quality cyclical areas with solid cash flows. We think these areas could be poised to outperform once the economy has clearly entered a recession, as they could lead an economic upswing.

In private equity, we see select opportunities, but valuations as a whole appear unclear and many investors continue to hold off on allocations as recession worries rise.

Fixed income

Anders Persson

Best ideas

• Within taxable fixed income, our highest-conviction idea remains a flexible and diversified multisector approach, with a focus on higher-quality credits across sectors.
• For municipal bonds, we see compelling opportunities in both high yield credits and bonds with maturities greater than 15 years, which appear relatively undervalued.

Investment positioning

Broadly speaking, the risk/reward tradeoff for fixed income assets looks attractive. The era of aggressive interest rate increases appears to be over. And while rate volatility may remain high (especially on the front end of the curve), we think the 10-year Treasury yield should remain range-bound between 3.25% and 3.75%. We anticipate a mild recession and believe any weakness across taxable and municipal markets in advance of a recession could represent an even more attractive entry point if spreads widen.

Within taxable fixed income markets, we think it makes sense to reduce short-duration positions and move closer to neutral given that rates have peaked for the cycle. Additionally, we are focused on higher-quality segments of individual asset classes (for example, in U.S. high yield, BB rated areas look more compelling than B or CCC rated).

Additionally, we suggest an overall emphasis on flexibility and diversification across credit sectors versus over- or under-allocating to any one area, as we see solid (if idiosyncratic) opportunities across the global taxable fixed income market. Within that context, however, we continue to favor the higher-quality areas of high yield. And, as mentioned earlier, preferred securities as a whole continues to face difficulties from banking sector issues.

In municipal markets, we think fundamentals remain sound, with state and local governments flush with cash. Credit quality looks healthy and valuations remain reasonable for both investment grade and high yield bonds.

We are generally focused on longer duration across the municipal yield curve and see value in adding credit risk across the market thanks to the favorable backdrop.

We are highly constructive toward private credit markets, especially in the event of only a shallow recession.

Real estate

Carly Tripp

Best ideas

• In addition to the above, we remain focused on “global cities” experiencing growing, educated and diverse populations, especially in the health care, industrial and housing sectors.

Investment positioning

The headwinds putting pressure on private real estate markets over the last year remain, but we think they are starting to fade. Deal activity remains subdued, liquidity has been scarce and borrower defaults are still increasing (primarily in the office sector). Real estate fundamentals still look supportive, but the negative technical factors may continue to drive markets for now. Our best bet is that the negatives will recede over the next couple of quarters.

In this environment, we continue to favor real estate debt over equity, as the interest rate environment appears to be stabilizing. In particular, we prefer the industrial and housing sectors.

We also continue to see idiosyncratic opportunities across geographies. In the U.S., we like affordable housing given solid government support, as well as specialized medical offices that benefit from aging demographics and the steady trend toward outpatient procedures; we favor European suburban housing (specifically rentals) in areas experiencing growing industrialization; and in Asia we prefer investments benefiting from demographic trends such as Tokyo senior living facilities and Australian student housing.

Public & private real assets

Justin Ourso
Jay Rosenberg

Best ideas

• In public markets, our best ideas in infrastructure are regulated utilities, waste and pipelines; in real estate, we are focused on shopping centers and senior housing.
• In private markets, we still favor 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

For some time, Nuveen’s Global Investment Committee has favored public infrastructure investments, and that theme continues. Fundamentals remain solid and defensive, while valuations look fair. In particular, we favor North American utilities and waste companies, and we see attractive opportunities in European and Asian utilities as well. We are also increasingly focused on investment grade debt issued by infrastructure companies that offer attractive yields and solid credit conditions.

As detailed previously, public real estate offers favorable valuations and should benefit from the end of Fed tightening. We prefer companies with strong balance sheets, superior access to capital and property holdings in sectors with positive fundamentals in this high interest rate and inflationary environment. These include owners of shopping centers, industrial properties and senior housing. We remain wary of the office sector.

Despite higher costs of capital, private infrastructure stands to benefit from the strength of many underlying business and/or asset fundamentals, as well as still-high inflation. We’re seeing the best opportunities in investments that capitalize on the ongoing shift from fossil fuels to green electrification.

Farmland remains an attractive asset class, with row crop appreciation expected to continue throughout 2023. We also see value in agribusiness companies, particularly pet food producers. We like timberland investments as well, as they should get a boost from increased housing demand.

The commodities landscape is showing signs of improvement given a more stable interest rate environment, but we are not yet expecting a new commodities bull market.