2023 2Q GIC outlook: Caught in a holding pattern
Views from the Global Investment Committee
- Caught in a holding pattern
- Portfolio construction themes and our highest-conviction views
- The economy and markets
- Our best investment ideas
- Investors are unnerved by a combination of banking sector turmoil, inflation pressures and an uncertain interest rate environment.
- Until more clarity emerges, we expect investors will be in for a bumpy ride.
- Our investment themes focus on preparing for an economic slowdown, capitalizing on shifting market values and balancing risks across public and private markets.
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Caught in a holding pattern
Saira Malik, Chief Investment Officer
Our 2023 year-ahead outlook forecasted terrain that would be difficult to cross: persistent inflation pressures, moderating interest rate hikes, slowing economic growth and a likely recession. We titled that outlook Peaks and valleys: Navigating the rocky market landscape, acknowledging the easing of some risks and the rise of others.
In the early weeks of 2023, a disinflationary trend took hold, fueling a market rally and optimism for an impending pause in rate hikes. Volatility surged in March, however, following the failure of Silicon Valley Bank and perceived instability of the U.S. banking system. Should that instability continue, it could complicate the Fed’s ability to promote financial stability and measured inflation, adding yet another element of uncertainty to the outlook. Regardless, we seem to be already in that “higher-for-longer” interest rate environment, which is likely to trigger slower growth, make life more difficult for consumers and cause tighter liquidity conditions, all of which have portfolio construction implications.
Given the complicated economic and market backdrop, investors are facing a difficult journey. Unfortunately, we don’t expect a smooth ride given that several risks still loom large. While the interest rate outlook remains uncertain, the post-GFC world of ultra-low rates is clearly behind us. Inflation remains elevated. And we expect the global economy will slow. In other words, investors are caught in a holding pattern until we get more clarity around the direction of rates, inflation and growth.
So what should investors do during this holding pattern? We unraveled that conundrum in our most recent Global Investment Committee sessions. And our conclusions lead us to offer the following three portfolio construction themes:
Prepare for landing. We anticipate a mild recession, which leads us to argue for primarily defensive positioning. Visibility remains low, and the GIC suggests preparing for a bumpy ride beyond 2023 as the Fed remains in “wait and see” mode. Ultimately, the landing will be determined by when inflation is finally anchored and how quickly the associated downside risks are mitigated.
Don’t put your portfolio on autopilot. Some areas might make sense to pare back (such as investment grade taxable fixed income) and other areas may warrant leaning in (like emerging markets equities). In other words, a holding pattern doesn’t mean investors can take their hands off the proverbial controls. Markets have moved noticeably over the last several months, causing relative values to shift within and between different asset classes.
Balance the public/private predicament. This important theme from 2022 remains in focus, as many expect and fear that the public markets selloff from last year will work its way into private markets. We see some technical pressures in areas of private real estate, for example. But we also see areas of the private investment space that remain attractive, such as private credit.
Our updated asset class heat map and our asset class “best ideas” outlooks show how these themes specifically play out and outline the advice we’re offering to our clients. Overall, though, while we await clearance to land, we expect more turbulence and volatility. And at the risk of stretching this metaphor past its breaking point, we suggest buckling your seatbelts and expecting a bumpy ride.
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.
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