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Weekly CIO Commentary

With inflation warm, consider infrastructure investments

Saira Malik
Chief Investment Officer
Saira Malik photo

Bottom line up top:

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Still-warm inflation in the U.S. suggests that the Fed won’t be cutting rates in the immediate future.
  
CIO weekly commentary chart 1

Portfolio considerations

 

Last week’s market pullback served as a reminder of just how fragile the current bull market has been since it has been built largely on overly dovish expectations for monetary policy and interest rates. Already-frothy valuations also helped fuel the setback, especially among mega-cap tech companies that have provided the lion’s share of gains since early November.

Moreover, the decline in stock and bond prices highlights the importance of balancing risks across a diversified portfolio. In the current environment, we see compelling reasons to focus on more defensive areas of the market, including listed global infrastructure. This asset class has demonstrated a substantial track record as an inflation hedge (Figure 2), thanks in no small part to its long-term contractual cash flows. Infrastructure companies also tend to benefit from inelastic demand for their functions or services, as well as regulation that allows for almost-immediate inflation pass-throughs.

Within U.S. infrastructure, we prefer midstream pipelines, waste management and utilities. As the world relies more on U.S. energy resources, midstream pipelines look poised to benefit from the escalating challenges of scarce global energy. We expect waste management companies to deliver above-market growth thanks to unwavering demand for their operations that convert to pricing power. For utilities, U.S.-oriented operations and a supportive regulatory environment provide a degree of protection from geopolitical threats, enabling some of the increased cost of capital and inflation to be passed on to consumers. We also think that both utilities and waste management offer attractive valuations compared to the broader stock market.

Global infrastructure companies appear particularly well positioned in the current environment.
CIO weekly commentary chart 1

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 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. 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. 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. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks may be magnified in emerging markets. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage.

Nuveen, LLC provides investment solutions through its investment specialists.

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