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Weekly commentary

Equities shrug off employment miss

Equities Investment Council
The Nuveen Equities Investment Council is led by Saira Malik and comprises the firm’s senior portfolio managers averaging three decades of investing experience.
Saira Malik
CIO, Head of Global Equities
Equities Investment Council member Saira Malik

Weekly market update highlights

Most broad-based indexes appreciated last week, with the S&P 500 enjoying its third consecutive week of gains and rising seven out of the past eight. The tech-heavy NASDAQ bucked the trend, falling nearly 1.5% as trading favored cyclicals over growth and defensives areas of the market. The DJIA added 2.7%, while the MSCI EM, EAFE, and ACWI ex-USA all rose between 0.1% and 2.6%.

Economic week in review

Market drivers & risks

We see solid long-term investments in value styles and select cyclical areas, as well as compelling opportunities in small caps.

Risks to our outlook

Given the magnitude of the miss in last week’s employment data, investors have likely reset their expectations for the timing of the recovery. As a result, we expect a greater degree of volatility around future economic data, and expect investors may focus on those numbers rather than on Fed comments pertaining to the tapering of quantitative easing.

The debate over tax reform is heating up, as both political parties continue to express a willingness to negotiate. Any negativity surrounding these discussions, as well as the legislative battle for an infrastructure package, will likely create pockets of volatility.

New COVID-19 cases and varying vaccination rates across the globe could also create volatility for global equity markets. On a related note, incrementally better news out of the U.S., combined with incrementally worse news elsewhere, has led to a recent strengthening of the U.S. dollar. This is likely to create near-term headwinds for emerging markets.

Best ideas

Increased economic reopening and recent underperformance have created opportunities in U.S. small caps. We favor consumer service sectors, especially in areas where unemployment remains elevated, and we are keeping an eye on industrials that could benefit from publicly funded infrastructure. Tactical opportunities remain in technology and growth stocks, but with a high degree of selectivity, as the “shelter-in-place” trade may no longer provide a broad benefit to all companies. We also remain bullish on emerging markets over the long term, as efforts to stem the spread of the virus eventually take hold.

In focus: Tailwinds for emerging markets equities

Though global equities may appear overvalued when compared to their own history, relative valuations appear to favor emerging markets: Per FactSet, EM equities are currently trading at a 25% discount versus their historical relationship with U.S. equities. Several important tailwinds reinforce this point:

  1. Strong growth from China

  2. A weaker U.S. dollar

  3. Possible incremental improvements in geopolitical outlooks.

  4. A widening growth gap with EM earnings per share 10% higher than in the U.S.

It is also worth considering the duration and magnitude of the cyclical relationship between U.S. and EM equities. During the decade ending in 2019, U.S. equities outpaced EM by approximately 750 bps, on an average annual basis. In contrast, EM equities outperformed the U.S. by 1,250 bps per year during the prior decade (2000- 2009). 2020 may have been a transition year, as emerging markets kept pace with the U.S. and outperformed significantly in the fourth quarter.

Though several EM countries continue to struggle amid the pandemic, we are optimistic that the global economy will eventually follow a similar path to recovery as the U.S. As a result, we believe this is a good time for investors to consider evaluating their exposure to emerging market equities given their solid prospects.

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Endnotes

Sources

All market data from Bloomberg, Morningstar and FactSet
  
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.

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