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Asset class outlooks
Asset class outlooks
Equities: Positioning for a more “normal” environmentSaira Malik, CIO, Head of Global Equities
- Dividend-paying (and growing) companies appear attractively valued in an ongoing low-rate environment.
- We also think U.S. small caps offer value and we are favorable toward emerging markets equities.
- And across markets, our key investment theme centers on looking for quality across geographies, sectors and industries.
Opportunities and positioningThe overall backdrop for equities appears favorable. We expect interest rates to remain relatively low, and global economic growth should pick up throughout 2021, especially once most of the world can access a reliable coronavirus vaccine.
Equity markets were primarily driven by shifts in valuations in 2020. Going forward, we expect corporate earnings will play a bigger role. And based on the factors we just cited, prospects for earnings appear solid for 2021.
Volatility will likely remain relatively high over the next few months as the coronavirus pandemic worsens. And a lack of clarity around additional U.S. fiscal stimulus could be a headwind for stocks. Looking ahead to the second half of 2021, we think conditions will generally return to a more normal and less volatile environment that should allow markets to climb more consistently.
Overall, we are positioned for a modest risk-on market in 2021. We think receding volatility and slow-but-positive economic growth should be a tailwind for active managers. While growth and technology sectors dominated 2020 performance, we expect the market will broaden in 2021. In particular, we think U.S. small caps appear relatively undervalued and we also favor emerging market equities given the likelihood of a weaker dollar. We’re not ready to call for a longer-term shift to value over growth, but expect less dispersion between the two styles in the year ahead.
Companies focused on ESG criteria should continue to do well next year. In our view, ESG-focused companies tend to be higher quality and interest in ESG investing continues to grow.
Regarding private equity markets, new deals remain scarce. For existing entities, we favor those that have been highly defensive — shoring up liquidity and strengthening balance sheets to be better positioned when the economic environment stabilizes.
Risks to our outlookAs indicated previously, the next few months could remain challenging for investors. Continued high volatility and possible near-term market selloffs are likely. On the plus side, stock prices have been highly resilient in recent months and have recovered quickly from declines.
Worse-than-expected economic growth would be a negative for our modest risk-on positioning. Likewise, the intense and sharp rallies in lower-quality stocks that we saw immediately after the U.S. election would be a risk, as we are looking for a more normalized trading environment.
Fixed income: Modest risk overweight with a focus on creditAnders Persson, Head of Global Fixed Income, Chief Investment Officer
- We particularly favor middle market loans and junior capital lending opportunities.
- In public markets, our favorite sector is emerging markets debt.
- A combination of accommodative central bank policies, low rates, a weaker U.S. dollar and still-attractive valuations make EMD investments compelling.
Opportunities and positioningWe expect modest, if uneven, improvement in economic growth, low interest rates and ongoing monetary and fiscal policy support in 2021.
The U.S. Federal Reserve and other global central banks have indicated they will keep interest rates extremely low for the foreseeable future. This pledge is improving liquidity and helping to keep the global economy afloat, but it also complicates the already difficult proposition of finding yield and income.
Our portfolio positioning as we head into next year includes a modest risk overweight with a focus on credit sectors. We think it makes sense to underweight Treasuries and other government bond sectors, given that they appear relatively expensive. Instead, we prefer to focus on credit sectors — we are looking for credits with durable free cash flow and solid balance sheets across a variety of markets, including investment grade credit, non-agency mortgagebacked securities, preferred securities and select high yield and emerging markets bonds. In particular, we are focused on the mid-quality rating segments of the market, which appear to offer the best relative value.
Focusing on ESG factors remains an important theme as we assess individual credits; we have long incorporated these factors into our investment selection process and believe investments that score highly on our internal ratings should be 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 outlookThe biggest risk to our outlook would be a return to a risk-off environment, similar to earlier this spring. Such an environment would cause a widening of credit spreads and a flight to quality that would work against our positioning.
At the same time, a drastic shift to a more aggressive risk-on stance that favored highly distressed credits or areas most significantly hurt by the pandemic would also be a negative for our more modest approach.
Municipals: Resilient credits, low defaults, recovering demandJohn Miller, Head of Municipals
- Land-secured bonds remain an area of focus.
- We also see value in high yield municipals, especially those that could benefit from a more risk-on stance that favors leverage and credit exposure as conditions continue to improve.
Opportunities and positioningFollowing a challenging period in the spring, the municipal market continues to heal as U.S. economic growth recovers. At the same time, the Fed should maintain its zero-interest-rate policy into 2022 and will likely maintain its quantitative easing program to contain longer-term rates and support liquidity conditions across fixed income markets. All of these factors create tailwinds for municipal bonds.
Municipal credits entered the pandemic historically strong, and have generally proven more stable than expected. While demand for municipal bonds dropped sharply in March and April, it has been recovering ever since, especially for investment grade credits.
Additionally, defaults remain rare and concentrated in just a few esoteric sectors of the marketplace.
Our bias remains toward long duration positioning, and we favor more credit sensitive areas to generate additional yield. But opportunities remain highly idiosyncratic, which speaks to the importance of diligent research and security selection.
Investment grade municipal credit spreads have continued to tighten, and municipals should fare well as the economy recovers. Within high yield, spread widening has caused certain areas to underperform. We think high yield fundamentals remain intact, however, and recent widening has created pockets of undervalued areas.
ESG factors remain important, and we see value in projects focused on clean water, recycling and food resourcing.
Risks to our outlookThe main risk to our positioning would be a continued worsening of the coronavirus pandemic that could spark additional lockdowns and curbs on economic activity. We could see regional limitations, but national restrictions remain unlikely.
Inflation is always a risk to municipal bond investors, but inflation pressures in 2021 should be modest enough to allow the Fed to maintain its interest rate positioning. We are watching for signals that the Fed might be winding down its QE programs (i.e., another “taper tantrum”) that could cause risks to longer duration positioning.
Real estate: Opportunities are growing more differentiatedMike Sales, CEO of Nuveen Real Assets and Real Estate
- We see opportunities in European debt investments, as the banking system is providing less financing than usual.
- We also like Asian housing, logistics and alternative real estate investments that are enjoying stronger relative growth.
- Finally, we continue to focus on “global cities” that are benefiting from demographic and technology advantages.
Opportunities and positioningThe global economic recovery should continue, but it is growing more uneven across regions, cities, property types and sectors. In particular, Asian economies are improving more quickly than the U.S. or Europe, creating better opportunities in some places than others (e.g., we remain negative on U.S. retail and office space, but more positive on Asian housing and office properties).
We expect easy central bank policies and still-strong capital flows will remain supportive for real estate. We believe monetary conditions will remain extremely loose for years, which will have broad-reaching implications across financial markets.
The coronavirus pandemic is accelerating existing trends. Retail commerce is shifting more rapidly to online purchases, which favors industrial real estate over traditional retail. Likewise, demand for suburban real estate is exploding, especially in the U.S., creating demand for single family rentals.
Health care spending is increasing, which has notable implications for real estate investing. Life science, senior housing and medical office investments all look attractive as the global population ages and more medical activity shifts from hospitals to more cost efficient medical offices.
Additionally, we remain focused on investment issues such as how climate change is affecting real estate trends, including properties becoming more energy efficient and people changing where they choose to live.
In the U.S., we expect price declines across some office and retail sectors could create value. Within the office space, we favor smaller boutique investments with an emphasis on environmentally sustainable properties.
Risks to our outlookIn general, we favor alternative real estate investments such as medical and life science investments, multifamily housing and industrial properties. These investments can be difficult to source, so investment scarcity could become a risk.
Related, we see some near-term pricing risks as capital floods into industrial, apartments and the alternative property types. The apartment sector could experience some pressure, but industrial pricing risk should be mitigated by increasingly strong tailwinds and alternative sectors should benefit from fewer investors being able to immediately access them.
Private and public real assets: Resilience and relative safe havensJustin Ourso, Senior Managing Director, Head of Nuveen Real Assets
Jay Rosenberg, Head of Public Real Assets and Portfolio Manager
- We see opportunities in suburban and Sunbelt real estate and technology-driven infrastructure.
- We also favor utility investments focused on renewable power sources.
- Agriculture investments represent a particularly attractive opportunity due to their defensive characteristics and ability to capitalize on trends such as healthier diets.
- We also favor private impact investing in spaces such as affordable housing, resource efficiency, inclusive growth and renewable energy generation.
Opportunities and positioningAcross public and private real assets, demand has increased for relatively safe-haven investments that have been resilient during times of broader financial market volatility and economic uncertainty. In particular, we see value in investments that feature reliable cash flows and may be more insulated from short-term market dislocations. In addition, we also are finding oversold opportunities in securities with stabilizing fundamentals with healthy balance sheets in some out-of-favor sectors that we expect will benefit when we see more economic normalization.
Broadly speaking, an environment of lower interest rates remains a plus for most real assets. Additionally, inflation may become more of an issue in the coming years (although likely not in the short term) and real assets can be a valuable inflation hedge.
In public real assets, a sharp differentiation exists between relative winners and losers, although we could see the performance gap narrow somewhat as the prospects improve for re-opening parts of the economy that have been most impacted by social distancing. In real estate, for example, traditional retail, office and hotel businesses have experienced a downturn given pandemic-related restrictions, but industrial, data centers and logistics continue to display stable to improving outlooks.
Likewise, many infrastructure areas such as airports and toll roads continue to face pressure, but could begin a lengthy path towards normalization as the pandemic subsides. Conversely, technology, utilities and transmission investments show stable growth now that could improve even further based on changing consumer demand, workforce flexibility and preference for cleaner sources of energy.
Private real asset investments across certain agriculture and timberland markets have been helped by rising demand and tighter supplies. Additionally, many of these investment areas have been relatively well insulated from the coronavirus-related economic upheaval given the essential nature of the industry and their relative illiquidity.
Across all private real asset investments, we remain focused on sustainability, supply chain and distribution resiliency.
Responsible investing has long been a critical part of our investment processes, and if anything is growing in importance. Opportunities to enhance risk/return profiles abound in areas such as utility companies lessening their carbon footprints, real estate investments offering better environmental health and companies focusing on responsible governance. Compelling opportunities in impact investing include areas such as affordable housing, resource efficiency and inclusive growth strategies.
Risks to our outlookAny combination of slower economic growth, rapidly rising interest rates without inflation or a stronger U.S. dollar would be a negative. Additionally, a significant tightening of credit conditions could cause yields to spike across markets.
In general, we have been negative on listed real estate, infrastructure investments focused on the consumer sector and fossil-fuel-based energy infrastructure. This could change as prospects improve for a cessation of pandemic related demand destruction. As these outlooks improve in these beat up sectors, it could work against defensive growth oriented positioning.
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.