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On a clear day you can see forever, but now - not so much. Global equity markets traded with a cautious but generally resilient tone last week. In the U.S., investors weighed U.S./China trade tensions, the ongoing federal government shutdown and earnings growth for artificial intelligence (AI)-driven tech companies. AI enthusiasm helped keep non-U.S. equity markets generally buoyant as well.
U.S. Federal Reserve Chair Jerome Powell's latest public comments were also in the spotlight. Powell acknowledged that both labor supply and demand have waned - suggesting looser employment conditions after the tightness that fueled wage growth through 2024 (Figure 1). He added that while inflation remains "somewhat elevated," risks to the labor market have come into sharper focus. Markets interpreted Powell's tone as balanced: dovish enough to support risk assets but wary of declaring victory over inflation.
However, the fiscal impasse in Washington is clouding the Fed's visibility into employment and inflation trends, as key economic data releases are delayed while the government is closed. Historically, shutdowns have lasted about 20 days, with minimal long-term impact. But risks to the economy could rise if furloughed federal workers face permanent layoffs. For now, the largest near-term effect is on the Fed's data-driven policy framework, rather than on corporate earnings.
Speaking of earnings... U.S. companies have begun reporting third quarter financial results, with consensus estimates calling for year-over-year earnings per share (EPS) growth of +8.5% for the S&P 500 Index, according to FactSet. This favorable forecast puts the emphasis on sound company fundamentals as a counterbalance to the uncertain macro backdrop. The information technology sector is anticipated to deliver the strongest EPS growth, driven by the Magnificent 7 mega-cap companies and sustained demand for artificial intelligence and related capital investments. We like large cap tech stocks, but valuations are elevated, so we also favor diversifying portfolios with allocations to other equity segments such as dividend growers and infrastructure. Additionally, we see value in various areas of fixed income, including emerging markets (EM) debt.
We see value in diversifying portfolios with allocations that include various areas of fixed income.
Portfolio considerations
In fixed income markets, the bellwether 10-year U.S. Treasury yield has held near 4% as investors balance slower growth prospects against inflation that remains above the Fed's 2% target. Overall, spreads have stayed fairly tight, with markets still pricing in a soft economic landing. This environment presents opportunities in attractively valued fixed income asset classes that are supported by sound fundamentals with compelling yields. In that vein, our Global Investment Committee's recently published fourth quarter outlook includes an upgraded view on emerging markets (EM) debt. We believe there are five key reasons to consider this asset class:
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As with most fixed income sectors, coupon and carry are the primary sources of return. The yield advantage for EM debt versus global peers averages nearly 100 basis points (bps) on a ratings-adjusted basis (Figure 2).
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While tight, EM spreads look favorable relative to other fixed income sectors, and there are attractive spread opportunities, such as corporate-to-sovereign bonds, within the asset class as well.
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Many EM countries have proven adept at battling inflation and fiscal deficits, with their central banks ahead of the curve in terms of tightening or easing monetary policy depending on economic conditions. This has well positioned EM debt for what's expected to be a benign default cycle. EM fundamentals are strong after several years of high sovereign default rates. In fact, debt-to-GDP ratios are now much lower in EM than in the G7 developed countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S.). Moreover, corporate leverage in EM is substantially lower than in developed markets.
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Waning U.S. exceptionalism is a key theme that we're monitoring. The U.S. dollar has depreciated meaningfully relative to both EM and developed market currencies year-to-date. We're also seeing heightened investor interest in diversifying away from U.S.-centric fixed income portfolios, a potential boon for EM debt.
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Lastly, there's good news for investors who fear they may have missed the opportunity in EM debt following two (and what looks likely to be three) consecutive years of solid returns. EM fund flows are only now starting to turn positive after three straight years of outflows, signaling improved demand. If inflows continue to gain steam, as we anticipate, there's still plenty of room for the EM rally to run.
We recently upgraded our view on emerging markets debt due to attractive yields and strong fundamentals.
Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic "deep dive" discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
Related articles
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Fixed income markets rallied broadly as declining Treasury yields drove gains across corporate, municipal and emerging markets bonds.
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CIO commentary archive
Access previous issues of Saira Malik’s weekly CIO commentary on strategy and portfolio construction.
Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
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. Performance data shown represents past performance and does not predict or guarantee 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.
Important information 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. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer’s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. The value and income generated by bonds and other debt securities will fluctuate based on interest rates. If rates rise, the value of these investments generally drops. Taxable fixed income securities are subject to credit risk, interest rate risk, foreign risk, and currency risk. Neither Nuveen nor any of its affiliates or their employees provide legal or tax advice. Please consult with your personal legal or tax advisor regarding your personal circumstances.
Nuveen, LLC provides investment services through its investment specialists.
This information does not constitute investment research as defined under MiFID.
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