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Best ideas across asset classes
Asset class outlooks
- In addition to positive supply/demand dynamics, energy companies should benefit from capital spending discipline and a focus on returning cash to shareholders.
- Select emerging markets stocks, especially in regions with a strong or improving consumer base, also warrant a closer look.
Our outlook for global equities remains moderately bullish. With economic data painting a generally favorable backdrop, valuations have improved since the beginning of the year, and corporate earnings, while decelerating, are still strong. We expect equity returns to be positive for all of 2022, but volatility will likely stay elevated, making stock selection increasingly important.
Regarding the style debate, we see opportunities in both value and growth. Growth stocks are looking more attractive and are well positioned as economies slow. And value could benefit from still-high inflation. Geographically, emerging markets offer a better opportunity than non-U.S. developed markets thanks to better valuations and the balance of geopolitical risks. We think China, Brazil and, to a lesser extent, Indonesia are worth exploring.
From a sector perspective, energy continues to top our list (despite already outsized gains this year and ongoing turbulence in the oil and gas markets), as demand remains healthy and supply is still constrained. We also favor the technology sector, especially in the U.S., which has become more attractively valued and offers some defensive characteristics.
- We favor broadly syndicated loans, shorter-duration high yield bonds in the BB credit range and preferred securities.
We strongly favor taking credit risk and minimizing duration risk given our forecast for peaking, but higher-than-average inflation over the near-to-intermediate term, continued strong credit fundamentals and attractive valuations as a result of recent volatility.
We see the best relative value opportunities in higher-quality below-investment-grade areas of the global fixed income markets. Yields have improved significantly and fundamentals remain sound. Specifically, we like broadly syndicated loans, BB-rated U.S. high yield corporates and preferred securities.
Emerging markets debt has experienced significant volatility and has come under extreme pressure due to the invasion of Ukraine, subsequent sanctions of Russia and contagion effect across markets. However, there are compelling opportunities in areas such as sovereign bonds in the Middle East and Latin America, and also certain corporate industries such as pulp and paper and metals and mining.
- We particularly favor shorter duration high yield municipals, which are experiencing improving credit quality and have been relatively insulated from interest rate volatility.
- We also like bonds tied to taxes on residential real estate and those focused on electricity generation.
This has been the most challenging first quarter of the year for municipal markets since 1994. The asset class has been experiencing outflows and has cheapened significantly relative to Treasuries as rising rates (more specifically, expectations for rising fed funds rates) have hurt the market. Critically, though, the municipal selloff is not related to credit issues. Supply and demand factors remain a tailwind, defaults continue to be rare and we’ve seen numerous high-profile upgrades in credit quality.
This is presenting opportunities. In particular, we think it makes sense to become more aggressive by taking on credit risk in select lower-quality areas. Distressed sectors of the market and turnaround credit stories, such as bonds from Chicago, Detroit and Puerto Rico, look compelling and offer attractive yields.
More broadly, we have a favorable view of bonds backed by property taxes, and we see value in the energy and electric generation sectors.
- From a geographic perspective, we favor single-family rentals and highly specialized medical offices in the U.S., suburban housing and data centers in Europe and senior living and industrial properties in Asia.
Private real estate investments have been relatively insulated from recent market volatility, and we believe continuing global economic reopening and strong capital flows should provide ongoing tailwinds.
From a contrarian perspective, we see idiosyncratic opportunities in distressed retail real estate, especially in the U.S. but also in Europe. New store openings, increased foot traffic, good leasing activity and compelling prices are all causing us to take a close look.
We continue to see value in alternative real estate sectors, including senior living housing, medical offices and industrial properties.
We’re also continuing to work with the properties we own to drive renewable energy and sustainability to help enhance value.
Public & Private Real Assets
- In public markets, we are focused on investments that should withstand or even benefit from higher inflation, such as shopping centers where landlords can withstand and pass along rent increases, waste companies and midstream energy.
- In addition, we see opportunities in transmission and renewable energy investments.
- Across private real assets, we favor investments that align with climate transition themes such as carbon sequestration in natural resources, clean energy, renewable fuel sources and continued strong global demand for healthy foods.
We continue to see good opportunities in publicly traded real estate, especially in U.S. retail REITs that are benefiting from good leasing activity and appear attractively valued. Across real estate, we prefer companies with shorter lease durations and those with improving cash flow prospects, as these areas should be better insulated from rising rates.
In public infrastructure, we favor regulated utilities and energy infrastructure, including pipelines and renewable energy experiencing a tailwind from higher energy prices. In addition, U.S. waste-related infrastructure is appealing. This sector has the pricing power to pass along increased costs to customers and can do well when inflation is rising.
Private real assets including infrastructure, agriculture and timber should continue to benefit from high investor demand and relative insulation from inflation and economic cycles. We are focusing on assets and investments that have the ability to pass through price increases to mitigate inflation risks.
For investment themes, we’re focused on a renewable-energy and transportation-related infrastructure, agriculture investments benefitting from rising demand for timber and carbon sequestration, and sector-specific opportunities across infrastructure, agribusiness and farmland with the ability to mitigate and/or benefit from supply chain disruptions.
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.
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