2022 midyear outlook: From pain to gain
Views from the Global Investment Committee
- From pain to gain
- Portfolio construction themes: three things we know
- The economy and markets: key points to know
- Our best investment ideas
- Our highest-conviction trade: Municipal bonds have been unfairly beat up and offer compelling upside.
- Near-term risks favor battered public markets: The dramatic corrections across public equities, credit and real estate relative to their private market equivalents could represent rebalancing and upside opportunities.
- Growth may slow, but credit sectors look solid: We see compelling value in U.S. corporate high yield and loans, and expect a benign default environment.
From pain to gain
Saira Malik, Chief Investment Officer
Portfolio perspectives for turbulent times
In our previous outlook, we encouraged investors to tune out “noise” and focus on “signal” — economic and asset class fundamentals evidenced in hard data. We continue to endorse this approach, but acknowledge that even the most diligent followers of such advice have ample reason to bid good riddance to the first half of 2022.
Crossing this midyear milestone may elicit a symbolic sigh of relief, but turning a calendar page doesn’t alter market realities or address the matter of how best to position portfolios for the next six months and beyond. That’s the critical task in an environment where the noise has only grown louder, certain signals look less favorable and financial markets have doubled down on volatility.
In fact, as we enter the second half of the year, most of the first half’s significant headwinds are still in place: high levels of inflation, slowing growth, rising rates, Fed policy uncertainty and fallout from Russia’s war on Ukraine.
Not all is bleak, however. As we explain in our review of the economy and markets, we see some potentially better news ahead, including more moderate inflation, the ongoing resilience of the consumer and a Fed that might lighten its tightening touch after completing its initial round of outsized rate hikes.
This mix of measured optimism and elevated risks was the backdrop when Nuveen’s Global Investment Committee recently met to update our outlook and revisit best ideas for asset allocation and portfolio construction.
As a new step in this deliberative process, we asked our team of economic and investment specialists to think beyond the scope of their respective areas of expertise. The intentionality of this approach brought a truly cross-asset class perspective to the dialogue and debate, reflected in our asset class “heat map,” highest-conviction views and areas of disagreement, detailed in the following section.
More broadly, GIC members agreed on several key portfolio construction themes over the next 6 to 12 months:
- Fixed income credit sectors over equities. This preference is based on their more favorable risk/reward profile.
- Baby steps back to duration. With recession odds on the rise and bond markets already pricing in most of the pain expected from Fed rate hikes, it’s time to consider neutralizing duration underweights.
- Real assets vis-à-vis inflation. Infrastructure, farmland and commercial real estate may offer ways to combat high inflation — or benefit from it.
- Publics poised to lead. While there’s no denying the importance and value of maintaining a strategic allocation to private assets, beaten-down public markets currently offer extremely compelling upside potential in the near term.
Lastly, though we are long-term investors, we recognize that transitioning “from pain to gain” requires more than simply being patient, as if time could heal all investment wounds. Patience may be a virtue, but it’s not its own reward. That’s why our portfolio construction themes center on the search for value in specific asset classes where we expect our clients to be adequately compensated for the risks taken. This is the essence of Nuveen’s overall approach to pursuing successful outcomes in turbulent times — and all the time.
As Nuveen’s CIO and leader of our Global Investment Committee, Saira drives market and investment insights, delivers client asset allocation views and brings together the firm’s most senior investment leaders to deliver our best thinking and actionable investment ideas. In addition, she chairs Nuveen’s Equities Investment Council and is a portfolio manager for several key investment strategies.
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.
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