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Weekly CIO Commentary

Emerging investment opportunities

Saira Malik
Chief Investment Officer
Equities Investment Council member Saira Malik

Bottom line up top:

[Like what you’re reading? Sign up here for Nuveen’s weekly CIO commentary to receive content like this delivered to your inbox every Monday.]

U.S. equity and fixed income markets may be poised to rebound ahead of their counterparts in non-U.S. developed markets.
CIO weekly commentary chart 1

Portfolio considerations

So far in 2023, returns for both emerging markets debt and equity have outperformed their peers in the U.S. thanks to a collection of tailwinds, including an accelerated reopening of China; improved risk sentiment toward credit and a weaker U.S. dollar. An improving economic backdrop across the EM landscape also underpins expectations of stronger returns as GDP growth of EM countries is set to outpace that of advanced economies over the next two years (Figure 1). Within EM debt, attractive yields and the increasing potential for interest rate cuts should continue to support strong total returns. Also, EM debt issuers servicing U.S. dollar-denominated debt could find additional relief should the dollar continue to weaken. Broadly speaking — with technicals remaining supportive, larger cash balances on the sidelines and the challenges associated with distressed sovereign governments largely priced-in — headwinds should continue to ease for EM debt this year, alongside global inflation.

EM debt is a wide and diverse asset class with opportunities across sectors. Within local markets, we are focused on countries that raised rates earlier, and in some cases more extensively, than the U.S. Fed. This has led to a more attractive foreign exchange profile. We currently favor EM corporate issuances over sovereigns thanks to elevated yields among high quality, well-established EM-domiciled issuers. Among issuers, we prefer those with sound balance sheets and exposure to solid macroeconomic fundamentals, while tilting toward positive reform stories. We also prefer issuers with exposure to diversified commodities, balancing that with countries fueled by higher domestic demand amid a normalizing of economic activity from the impacts of Covid-19. These positions should be more resilient given the potential for slower economic growth. Though the macro backdrop has improved recently, selectivity will remain key.

EM equities could be rewarding for investors who have the ability to move further up the risk spectrum in search of higher return potential. EME valuations are well below their long-term averages and remain inexpensive relative to the U.S., while forecasted EPS growth estimates over the next few years are notably more attractive than developed market counterparts (Figure 2). Entering 2023, earning expectations are negative for EM companies, the first negative forecast since 2009. However, with renewed optimism in China and potential for geopolitical issues to improve, consensus forecasts may be too conservative.

chart 1
Entering 2023, earning expectations are negative for EM companies, the first negative forecast since 2009.

 

Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

Related articles
Investment Outlook CIO commentary archive
Access previous issues of Saira Malik’s weekly CIO commentary on strategy and portfolio construction.
Weekly Fixed Income Commentary Mixed economic data boost Treasury yields
U.S. Treasury yields rose as economic data mostly beat expectations.
Investment Outlook Fed hikes by a little less, but promises more to come
Brian Nick discusses the Fed hikes by a little less, but promises more to come in the December Fed meeting.

Endnotes

Sources

All market and economic data from Bloomberg, FactSet and Morningstar.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.

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. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible. 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. Concentration in infrastructure-related securities involves sector risk and concentration risk, particularly greater exposure to adverse economic, regulatory, political, legal, liquidity, and tax risks associated with MLPs and REITs. 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.

This information does not constitute investment research as defined under MiFID.

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