Best ideas across asset classes
Asset class outlooks
- Dividend-growers tend to be high quality companies with strong free cash flow levels and offer the added benefits of income generation and lower relative volatility compared to the broader market.
The 2022 headwinds that punished equities (persistent inflation, rising rates, geopolitical turmoil and recession fears) remain a force, but continue to shift and vary in magnitude. Investors have grown increasingly resigned to a fate of “higher-for-longer” interest rates—a theme central banks have been expressing for several quarters. We anticipate continued volatility and uncertainty, and this mixed environment leads us to favor a barbell approach when it comes to equity risk allocations.
We prefer an overall defensive stance across global equity markets, and favor investments with solid free cash flow, enough pricing power to help offset inflation and those with the ability to grow dividends while remaining predominantly agnostic of style, market cap or sector. Select industries, such as semiconductors and software, may be well suited for this unique environment given a degree of demand inelasticity and their historical ability to operate with tight margins.
To balance this positioning, we would look to emerging markets equities as an attractive option to take on more risk and gain some beta exposure. A weaker U.S. dollar, attractive valuations, improving earnings estimates and the reopening of China should all provide tailwinds.
Even before recent events, we were wary of the banking industry, and still expect additional volatility. We see select opportunities in some financials (particularly large, globally diversified companies), but remain cautious toward the sector as a whole.
Global small caps appear undervalued and are beneficiaries of easing inflationary pressures. While experience demonstrates the asset class’s propensity to underperform heading into an economic slowdown, small caps are typically among the earliest areas of the stock market to recover from an economic downturn.
- With credit spreads potentially vulnerable in the near term, our highest conviction views are to focus on mid- to high quality areas of the high yield and loans markets, as well as on preferred securities.
Despite the banking turmoil, conditions have improved for fixed income markets since the end of last year: credit fundamentals look healthy, inflation is moderating and global economic growth remains solid. Valuations have adjusted considerably and are now closer to fair value levels, though medium-to-longer-term income generation opportunities still appear robust.
Our key investment themes are to emphasize credit risk over duration risk and to focus on flexibility and diversification across credit sectors versus over- or under-allocating to any one area.
Within that context, however, we recognize that investment grade fixed income has had a strong run. While we continue to see pockets of opportunity, that area of the market as a whole appears fully valued.
Across other areas of the market, we are slightly more positive toward emerging markets debt as economic stability increases. We also think senior loans offer compelling yields and we continue to see value in high yield bonds — especially in the higher credit quality areas. Additionally, we like select names in preferred securities thanks to attractive valuations.
- In the investment grade space, we see the best opportunities in select longer duration, high quality bonds that continue to offer value.
- The high yield area offers a number of idiosyncratic opportunities in areas such as specialty transportation.
The sharp and painful decline across municipal bonds finally turned the corner at the end of 2022. The asset class has since enjoyed a strong snapback, and investor inflows returned with a vengeance. In retrospect, the selloff was clearly based more on sentiment and technicals (e.g., inflation fears and rising rates) than fundamentals. Nevertheless, investors should expect ongoing volatility in municipal markets.
We see continued value in taking on some duration risk in municipal bonds. Fundamentals remain sound and credit quality looks healthy. Given the strong January rally in municipals, some relative value has been taken out of the market, particularly on the investment grade side within short to intermediate maturity ranges.
At present, we’re seeing the best value in lower coupon (around 3%), longer duration, high quality municipal bonds backed by essential service sectors. These areas of the market offer attractive yields, relatively wider credit spreads and appear very well positioned to withstand a recession or economic slowdown.
- In addition to the above, we remain focused on “global cities” experiencing growing, educated and diverse populations with a particular focus on the health care, industrial and housing sectors.
While property-level fundamentals remain strong within the areas of our primary focus (housing, industrial and alternatives), private real estate markets continue to experience headwinds associated with macroeconomic volatility and uncertainty. As a result, deal activity remains subdued and access to liquidity is limited. While we are seeing some market activity return, many investors expect private real estate valuations to lag public markets, which have returned a portion of the losses experienced in 2022.
In this environment, we continue to favor real estate debt over equity, as yields today are higher than cap rates in many circumstances. Within this area, we prefer structured and high-yield debt investments.
We also continue to see idiosyncratic opportunities across geographies: in the U.S., we like specialized medical offices that benefit from aging demographics and an increasing move toward outpatient procedures; we favor European suburban housing (specifically rentals) in areas enjoying growing industrialization; and in Asia we prefer investments such as Tokyo senior living facilities and Australian student housing benefiting from demographic trends.
Public & private real assets
- In public markets, our best ideas include industrial real estate and investments that should benefit from improved Chinese economic growth and reopening, such as Hong Kong real estate.
- We also favor defensive investments such as regulated utilities and waste companies.
- In private markets, we continue to focus on investments that align with climate transition, such as clean energy, renewable fuel sources and continued strong global demand for protein and healthy foods.
Heading into 2023, we emphasized opportunities in public infrastructure investments as an area that could perform well when interest rates rise and economic growth slows. The investment thesis for listed infrastructure still holds. We particularly favor U.S. regulated utilities and waste companies, and see risks abating somewhat across European infrastructure, particularly in utilities and transportation.
Public real estate markets faced notable underperformance in 2022 and look attractive. We see solid opportunities in the asset class, particularly in the industrial, strip retail and select net lease segments. We are less favorable toward the office sector, which continues to struggle.
Private infrastructure investments should benefit from many of the same trends that their public counterparts enjoy. We emphasize investments that benefit from the continuing global energy transition from fossil fuels to electrification and clean energy generation.
Across other private real assets, we see value in agribusiness companies, particularly those focused on protein sectors and food ingredients for both human and pet food consumption, and also favor timberland investments that should benefit from increased housing demand. We continue to like farmland investments (especially row crops), but we expect the pace of farmland price appreciation to slow from the elevated levels seen in 2021 and 2022.
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. 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.
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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