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Investment outlook

Asset allocation views

A runner's feet on a track

We’re expecting 2022 to feature slower (but still solid) economic growth, ongoing inflation pressures, slowly rising interest rates and diminishing fiscal and monetary policy support. Investment in this environment could be tricky, but here we offer broad allocation views we think should prove effective and — equally important — our thoughts about what might work against our positioning. In the following sections of our outlook, we offer asset class-specific “best ideas” and overall portfolio construction themes.

1. 2022 should still be a “risk-on” year. 

Global financial markets seemed priced for the middle or perhaps later stages of an economic cycle, but we don’t see a recession on the horizon. In fact, we expect global economic growth to remain firmly above trend in 2022. Even though valuations appear relatively full across many areas of the global financial markets, we still believe it will pay to stick with risk-on positioning.

In particular, we think this means emphasizing public equities and a range of alternatives in portfolios. For equities, we generally have a cyclical tilt and see value in U.S. small caps and non-U.S. developed markets. We would also focus on public infrastructure investments, which we like more than public real estate. Across alternatives, we’re quite positive on private credit markets and see select opportunities across private real assets and real estate.

Across public taxable and municipal fixed income markets, we would emphasize credit risk over interest rate risk. We believe investors can find yield and total return opportunities by moving lower on the credit spectrum. And while we see some value in longer-duration municipals, for global taxable fixed income markets, we favor a lower duration stance given the relative flatness of the yield curves and our belief that central banks will not over-tighten.

Finally, we do not think investors should be strategically holding cash. Having some cash and liquidity is necessary, but we encourage investors to enter 2022 fully invested, as aligned with their investment policies and long-term goals.

2. Expect (but don’t overreact to) elevated inflation and higher interest rates.

This is the corollary of our growth views. We anticipate interest rates will move somewhat higher over the course of 2022, and, while it is not our base case, we wouldn’t be surprised if the U.S. Federal Reserve starts increasing rates before the end of the year. Likewise, we think inflation will remain above its pre-pandemic average throughout 2022.

Our bottom-line view about rising rates and high inflation: We think markets have mostly priced in these risks and can handle modest inflation and a couple of Fed rate hikes. Public equity and credit markets can still thrive in environments of low-but-climbing rates and elevated inflation. Real assets and real estate remain important inflation hedges in addition to their fundamental attractiveness.

While we think investors should keep an eye on the rates and inflation backdrop, there is no need to overpay for inflation hedges or prepare portfolios for runaway inflation or massive interest rate spikes.

3. Structure portfolios for yield and income.

Interest rates should rise over the course of 2022, but yields are still at or near historical lows. Generating the income needed to sustain an individual’s retirement or structuring a portfolio to match assets to liabilities will remain a challenge.

We say more about finding specific income ideas and managing different income risks in the following sections of our outlook, but for now, we offer two high-level income-related asset allocation views:

 

But what if we're wrong?
Risks to consider

We’ve outlined a pretty optimistic (though tempered with caution) view toward 2022. But what if we’re wrong in our forecast? What trends might work against this positioning? Consider these counterpoints:

COVID-19 resurgence: We’re expecting the pandemic to remain a humanitarian crisis in many parts of the world, but believe most of the associated economic and market risks are behind us. If we see new coronavirus strains, problems with vaccine rollouts or (shudder) a new and equally horrible virus, that would certainly work against our risk-on positioning.

Runaway inflation and a loss in central banks’ credibility: If interest rates spike on a further dramatic rise in inflation expectations, our advice against overweighting explicit inflation hedges like gold or TIPS will have been proven wrong. At the same time, equity and real estate markets would feel the sting of higher rates and a dramatic steepening of the yield curve.

An organic growth slowdown or a Fed policy error: If an economic threat emerges that triggers slower growth or even a recession — or if the Fed panics and tightens monetary policy too quickly or by too much — our outlook would be in bad shape. Long-duration fixed income and defensive sectors of the equity market like utilities and consumer staples would be on the short list of safe harbors.

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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