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Weekly CIO Commentary

Sizing up opportunities in small caps and REITs

Saira Malik
Chief Investment Officer
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We suggest making incremental portfolio allocations to areas that have lagged the broader market due to their cyclicality and interest rate sensitivity.
  
CIO weekly commentary chart 1

Portfolio considerations

 

In our view, investors should be mindful of potentially outsized underweight exposures to U.S. small cap stocks and publicly listed real estate, with an eye on shrinking these underweights ahead of a possible rebound once the Fed finally pivots to looser monetary policy.

U.S. small caps remain attractively valued relative to large caps, with the forward price-to-earnings (P/E) ratio of the Russell 2000 Index versus the Russell 1000 Index near a 22-year low. Additionally, based on analyst estimates, earnings should grow faster for smaller companies in 2024. This is especially salient because corporate earnings growth has been the primary driver of stock price appreciation over the long run — a trend that should continue as inflation and interest rates gradually normalize. Lastly, small caps have historically outperformed large caps following the first move in a Fed rate-cutting cycle (Figure 2). With at least one rate cut priced in for later this year, small caps could see an inflection point.

Publicly listed real estate securities such as real estate investment trusts (REITs) were among the hardest-hit asset classes during this Fed tightening cycle, which began in March 2022. Given their elevated use of debt compared to broader equities, REITs declined precipitously (-21%) between mid-April 2022 and the end of October 2023, as measured by the FTSE Nareit All Equity REIT Index. But REITs have historically delivered strong relative returns in steady and declining rate environments. During the final two months of 2023, with the Fed on pause and market expectations for rate cuts peaking, REITs returned +22%. Meanwhile, despite stable REIT fundamentals and generally favorable valuations, investor allocations to real estate are at their lowest level since the 2008 global financial crisis, according to a recent Bank of America survey of global fund managers. The scope of this underweight could be a potential contrarian signal to add incrementally to this sector.

Despite stable REIT fundamentals and generally favorable valuations, investor allocations to real estate are at their lowest level since the 2008 global financial crisis.
CIO weekly commentary chart 2

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:

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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. Past performance does not predict or guarantee 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.

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 investments are subject to market risk, active management risk, and growth stock risk; dividends are not guaranteed. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. The use of derivatives involves additional risk and transaction costs. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Real estate investments are subject to various risks associated with ownership of real estate-related assets, including fluctuations in property values, higher expenses or lower income than expected, potential environmental problems and liability, and risks related to leasing of properties. Investments in smaller companies are subject to greater volatility than those of larger companies.

Investments in smaller companies are subject to greater volatility than those of larger companies.

This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/ losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

Nuveen, LLC provides investment solutions through its investment specialists.

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