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2022 2Q outlook: Cut through the static
It feels like the number of “unknowns” is rising for investors, which is creating a lot of noise in the markets. But there are things we know, and focusing on these certainties should help investors create better outcomes.
Three portfolio construction themes based on what we know:
- The Fed has embarked on a tightening cycle: This favors credit over duration risk and creates value in large cap U.S. equities.
- Market volatility will continue to be friend and foe: Consider participating in volatility in distressed areas such as emerging markets debt, while shielding via private assets.
- Inflation has taken hold: We favor long-term inflation hedges such as equities, real estate and real assets.
We are confident investors can achieve positive results by isolating the clearest, strongest signals and tuning out the noise. We invite you to read our latest outlook to learn more.
More from the Global Investment Committee
- Cut through the static
- Portfolio construction themes: three things we know
- The economy and markets: key points to note
- Our best investment ideas
Cut through the static
Saira Malik, Chief Investment Officer
Separating noise from signal for better investment outcomes
Our initial 2022 outlook themes generally played out as expected in the first quarter: strong but slower economic growth, persistently hotter inflation, the onset of interest rate hikes and further bouts of elevated market volatility.
But two developments were unexpected: The geopolitical and humanitarian crisis unleashed by Russia’s invasion of Ukraine and a worsening disconnect between hard economic data and investor sentiment. Despite positive signals — powerful job creation, a steady drop in the unemployment rate and consumer resilience, to name a few — markets often behaved as if the only messages getting through were fragmentary sound bites on a doom and gloom wavelength.
To be sure, an inverted yield curve and an oil price spike can create meaningful implications for the economy, but neither means a recession must follow. Likewise, the combination of higher inflation and modestly decelerating growth that has characterized the past several months does not herald a return to 1970s stagflation. Lack of nuance in coverage of hot topics like these creates static that can interfere with calm, fact-based decision-making. Cutting through the noise is essential, especially during times of heightened turmoil.
That’s not to say genuine risks should be ignored. In fact, discussing and debating the toughest challenges — and the investment opportunities they create — is exactly what Nuveen’s Global Investment Committee has done in developing our outlook.
Investment portfolio construction themes
Our dialogue was spirited and far-reaching, as one would expect for a diverse group of economic and asset class specialists with strong convictions. Ultimately we coalesced around three portfolio construction themes built on familiar but evolving market drivers:
- The Fed: Certainty replaced “will they or won’t they?” speculation in March as the Fed initiated its long-awaited rate liftoff. While a headwind for duration-sensitive assets, rate hikes make credit more attractive on a relative basis. Some equity categories may benefit as well.
- Market volatility: Risk-on investors with the fortitude to weather wide price swings might find compelling entry points in beaten-up asset classes like emerging markets debt. For those with a lower risk tolerance, less-volatile private assets may provide refuge.
- Inflation: While we expect inflation to remain somewhat elevated, we don’t predict an out-of-control inflationary spiral. Allocations to select real assets and other traditional inflation hedges will likely serve portfolios well.
We explore our asset allocation ideas in greater detail in the outlook that follows. On balance, we’re confident investors can achieve positive results by isolating the clearest, strongest signals and tuning out the noise. We invite you to read on to learn more.
As Nuveen’s CIO and leader of our Global Investment Committee, Saira drives market and investment insights, delivers client asset allocation views and brings together the firm’s most senior investment leaders to deliver our best thinking and actionable investment ideas. In addition, she chairs Nuveen’s Equities Investment Council and is a portfolio manager for several key investment strategies.
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.
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.
Nuveen provides investment advisory services through its investment specialists.