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Investment outlook

Asset class outlooks

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Asset class outlooks

 

Equities: Anticipating shifts in economic momentum

Saira Malik, CIO, Head of Global Equities

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Opportunities and positioning

The global macro environment for equities looks favorable. Interest rates remain relatively low, inflation is volatile but not extreme, corporate earnings are solid, and global economic growth is climbing.

These factors have been present for several months, but the difference now is that earnings growth appears to be peaking in the U.S., and equity valuations look full in some sectors and geographies. This creates a complex backdrop for investing.

The tailwinds that buoyed high-multiple growth stocks are starting to fade. This argues for a focus on select value sectors and more reasonably priced growth stocks. Likewise, as momentum slows in the U.S., we are increasingly focused on opportunities in Europe and the emerging markets — areas where recoveries have lagged but could pick up steam as vaccinations rise.

One factor we are paying closer attention to is inflation. While we don’t expect a disruptive increase, we see value in emphasizing select areas of the global equity market that could benefit from a reflationary environment, such as U.S. small caps and, again, emerging markets.

We see signs that capital expenditures could start to pick up soon. We believe corporations that can increase their spending levels will be rewarded, as will the direct beneficiaries of their spending, such as suppliers of components, raw materials or other inputs.

Firms prioritizing ESG considerations should continue to do well amid the structural shift in investor preferences for ESG-conscious businesses. These companies tend to be higher quality and have effective risk management policies and procedures in place.

Conditions are improving in the private equity marketplace. We are seeing high quality deal flow as interest rates stay low, consumer balance sheets continue to strengthen, and business conditions and lending quality remain solid.

Risks to our outlook

Uneven inflation data may rattle investors, with potential ripple effects leading to broader market volatility. Unexpectedly hawkish rhetoric or policy from the Federal Reserve could tighten financial conditions, creating headwinds for earnings and valuations. Uncertainty surrounding federal spending and tax policies is unlikely to be resolved any time soon, which might keep some investors on the sidelines.

We’re cognizant of stretched valuations in some parts of the market, particularly where earnings growth may be peaking.

 

Fixed income: Risk on amid rising rates

Anders Persson, Head of Global Fixed Income, Chief Investment Officer

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Opportunities and positioning

The on-again, off-again advance in interest rates has been the main story for the first half of 2021, and we expect that to continue as the year progresses. We expect rates to increase as global growth climbs.

Rising rates are likely to be a headwind for the broad global fixed income market. At the same time, most spread markets look fully valued, and we see little room for spread compression over the next few months.

These factors lead us to focus on shorter-duration and higher-yielding (thereby higher risk) areas of the market. We largely prefer corporate credit risk over sovereign bond risk and lower-quality credits over higher-quality as we expect defaults will remain contained. We are focused on carry trades, taking advantage of higher coupons in these sectors even if spreads do not tighten any further.

We are focusing on specific sectors that performed well in the first half of the year. TIPS should do well as inflation advances, leveraged loans should benefit from higher rates and low defaults, high yield should hold up well due to its short duration profile and low default risk, and emerging markets debt should be aided by consistent demand for higher-yielding securities.

ESG factors have long been incorporated into our investment selection process and remain an important theme. As we assess individual credits, we believe investments that score highly on our internal ratings are relatively advantaged. 

Private credit markets continue to generate tremendous interest and look attractive. Deal activity appears solid for investment grade and middle market loan issuers, and underwriting standards remain high.

 
Risks to our outlook

Our views are based on expectations of continued economic growth, healthy corporate balance sheets, strong fundamentals and low defaults. If we see the opposite (sparked by, perhaps, a reversal in economic reopening), that would work against our positioning.

Likewise, we expect higher interest rates, modest increases in inflation and accommodative central banks for at least the next couple of quarters. Should any of that not come to pass, we would expect a more difficult environment.

 

Municipals: Fundamentals and technicals look strong

John Miller, Head of Municipals

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Opportunities and positioning

We expect the U.S. economy to be fully reopened by midsummer. This, combined with strong monetary and fiscal stimulus, has been propelling growth. On top of that, the Fed is expected to maintain its zero-interest-rate policy into 2022 and will likely maintain its quantitative easing program. This will contain longer-term rates and support liquidity conditions across fixed income markets. All of these factors create tailwinds for municipal bonds.

Credit conditions have been favorable, and defaults have been rare and isolated, thanks in part to massive spending by state and local governments. Technical factors have also benefited municipal bonds as supply has not kept pace with extremely high demand.

We are closely watching interest rate volatility. Municipal yields have advanced over the course of 2021, but have lagged Treasuries. We expect further upward pressure on yields across fixed income markets, which could create obstacles.

Outside of fundamental and technical factors, the U.S. political environment offers potential tailwinds. Higher tax rates are likely coming, which could further increase demand for tax-exempt municipals. Should an infrastructure program win passage, it would likely include a municipal bond subsidy program with similarities to the Obama-era Build America Bond Program. This could provide additional tailwinds for municipals.

Risks to our outlook

Inflation is always a risk to municipal bond investors, but we expect inflation pressures to remain modest enough to allow the Fed to maintain its interest rate positioning. We are watching for signals that the Fed might begin winding down its quantitative easing programs (i.e., another “taper tantrum”) that may spark volatility.

Municipal valuations are looking rich (more so for high grade than high yield) and we think fundamentals warrant current pricing.

 

 

Real estate: Leaning into the ESG evolution

Carly Tripp, Global Chief Investment Officer and Head of Nuveen Real Estate Investments

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Opportunities and positioning

We expect still-easy global central bank policies and strong capital flows to remain supportive for real estate. Monetary conditions should remain extremely loose for years, which should provide a tailwind for real estate investments.

In contrast, rising interest rates present a potential risk, but broad real estate values have been on the rise in 2021 despite rate increases. Furthermore, net operating income forecasts have been climbing after taking a hit in 2020.

We continue to favor alternative real estate sectors, specifically single-family rentals, self-storage facilities, medical buildings and life science investments. We also see continued strong activity across the industrial real estate sector.

Across all geographies and sectors, we see tremendous potential in ESG-focused investments, especially environmental impact. By our assessment, buildings represent between 30% and 40% of global energy usage, which presents opportunities for energy reduction investments and technologies.

We are looking at a number of ways to invest in on-site energy efficiency and conversions to renewable energy and are considering costs and return potential to transform buildings to net carbon zero standards. In our view, making these changes can generate long-term value and increase the attractiveness of properties to tenants who are increasingly placing higher value on sustainable spaces.

Risks to our outlook

Full asset pricing persists in certain markets and sectors, making selection criteria and discerning underwriting key. In well-bid sectors such as housing and industrial, competition continues to increase. While we feel the fundamentals make them worth the increasing costs, value is becoming scarcer and active management is key.

Similarly, these same investment opportunities can be difficult to source, so scarcity could eventually become a risk.

 

Private and public real assets: Economic reopening creates opportunities

Justin Ourso, Senior Managing Director, Head of Nuveen Real Assets
Jay Rosenberg, Head of Public Real Assets and Portfolio Manager

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Opportunities and positioning

We are continuing to see demand for investments that provide diversification versus traditional asset classes and that may be resilient during periods of economic uncertainty. We expect this to help keep interest in public and private real assets high.

From a macroeconomic perspective, an environment of lower interest rates remains advantageous for most real assets. As inflation becomes a growing concern, real assets can act as a valuable hedge.

As economic reopening speed varies by sector, we have seen a corresponding relative performance shift in the public real assets space. As consumers return to in-person retail shopping and leisure travel, real estate and infrastructure investments associated with these trends are becoming more attractive. Conversely, pandemic-related trends of suburbanization and remote work continue growing, which makes some urban residential and office investments challenging.

Private real asset investments have generally been cushioned from the coronavirus-fueled economic upheaval given the essential-service nature of many investments. In addition, reopening economies, a focus on carbon-neutral investing, and supply/demand imbalances continue to make sectors such as renewables and sustainable infrastructure, agribusiness, farmland, timberland and commodities appear attractive.

In both public and private real assets, the importance of ESG continues to grow. In public investments, we believe ESG factors are an important marker of quality. Since investors are increasingly seeking out ESG investments, companies with favorable ESG profiles tend to trade at a higher premium compared to those with unfavorable profiles. Keeping this information in mind, we are pursuing ESG transition stories across real estate and public infrastructure that have yet to be recognized by the broader market.

ESG considerations are a critical part of asset acquisition and ownership for private investments. Themes such as clean energy and energy transition, carbon, water-use improvements and sustainability are at the forefront of our minds. Similar to public investments, investors are increasingly “chasing” ESG investments, which highlights the importance of deal selectivity and the need to improve assets over time.

Risks to our outlook

Any combination of slower economic growth, rapidly rising interest rates or a significant tightening of credit conditions would be a negative for real assets.

While real assets are generally less susceptible to inflation pressures, a higher-than-anticipated move and corresponding increase in discount rates would pose a headwind for more defensive areas of the market.

We are increasingly focusing on political and regulatory risks related to higher tax levels or increased protectionism that could reduce returns or result in investment hurdles for cross-border assets and investments.

Contact us
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Dimitrios N. Stathopoulos
Head of Americas Institutional Advisory Services
Endnotes
Sources
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.
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