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Weekly commentary

Fundamentals intact but recovery concerns increase

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

Global equity markets were mixed last week. In the U.S., the DJIA and the S&P 500 both fell -0.4%, while the Nasdaq was down more sharply (-1.1%). Despite the loss, July marked the sixth consecutive monthly gain for the index. Outside the U.S., developed equity markets generally rose in U.S. dollar terms, with the exception of China (-4.3%), mainly due to China’s regulatory crackdown on its technology sector.

Market drivers & risks

Economic week in review

While markets continue to trade around all-time highs, we must acknowledge that the next few months could see increased volatility and near-term market selloffs.

Risks to our outlook

Global equity markets proved last week just how volatile they can be due to spiking COVID-19 data. We expect markets to remain highly susceptible to pullbacks as governments continue to deal with new variants such as Delta. The reinforcement of economic restrictions will almost certainly lead to a slowdown in global growth.

Economic forecasting remains a challenge. With decelerating growth taking center stage, we suspect equity markets may react negatively to economic data that miss consensus expectations.

Rate hikes likely remain far in the future and a flattening yield curve will hinder industries such as financials that are more sensitive to interest rate momentum. However, we suspect inflationary pressures may return as drivers such as wage inflation may create more permanent effects.

Any disruptions in the legislative process toward infrastructure stimulus could spark additional bouts of volatility.

Best ideas

We see opportunities in developed non-U.S. markets, particularly in Europe, which appears relatively inexpensive and should benefit from improved vaccination rates, solid earnings growth and a more cyclically oriented economy. In the U.S., reflation and expectations for higher yields could bolster returns for small caps, while select industrial companies should benefit from still-improving economic growth. We are also bullish on emerging markets, specifically Brazil, which offers opportunities tied to growth in the global digital economy, including innovative fintech and e-commerce names.

In focus: Health care sector investing in the COVID age

The pandemic created a dynamic environment for innovation and investment in the global health care sector. Governments around the world will prioritize more aggressive investment in local health care systems and infrastructure as we continue to combat COVID-19, learn more about its variants and acknowledge the prospect of new viruses in the future. These increased levels of capital expenditure could provide a long-term tailwind for life science companies.

With headlines focused on COVID-19, progress in emerging biotech has stayed under investors’ radar. Several new modalities/platforms, for example, allow scientists to more precisely target diseases through developments in MRNA and smart antibodies. We believe the value these modalities can generate will be recognized over the next several years.

We’ve seen the fruits of health care innovation in lower numbers of hospitalizations and deaths caused by the Delta variant versus previous dominant strains. Further innovation should yield scalable solutions that improve diagnosis and treatment, while providing compelling investment opportunities.

Health care returns have lagged the broad equity market since the pandemic began, despite generating stronger relative earnings growth. This has led to significant valuation discounts, making the sector a more attractive source of upside potential.

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Dimitrios N. Stathopoulos
Head of Americas Institutional Advisory Services
Endnotes

Sources

All market data from Bloomberg, Morningstar and FactSet
  
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