20 Mar 2023
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Investment outlook
Portfolio construction themes
Our portfolio construction themes center on acknowledging that downside risks to the economy remain, capitalizing on shifts in market valuations, and balancing risks across and between public and private markets. While growth remains solid (for now), we do seem to be in the “higher-for-longer” interest rate environment and inflation remains a concern. This perpetuates what has been a tricky investment environment.
Asset class “heat map”
Our cross-asset class views indicate where we see the best relative opportunities within global financial markets. These are not intended to represent a specific portfolio, but rather to answer the question: “What are our highest conviction views when it comes to putting new money to work?” These views assume a U.S. dollar-based investor seeking long-term growth and represent a one-year time horizon.
Portfolio themes
- Prepare for landing: We still think it makes sense to be selective with cyclicality and continue playing defense in diversified portfolios. Given downside risks, we expect to see a mild recession either this year or next.
This leads us to emphasize dividend-paying equities (for their more defensive and income-generating characteristics) as well as infrastructure investments that can weather a combination of slowing economic growth and volatile interest rates. Additionally, we have a common preference for relatively higher quality investments across asset classes (including fixed income, private equity and real assets). - Don’t put your portfolio on autopilot: Now may be a good time to consider taking profits in some areas and adding to risk in others. Many public market valuations have shifted noticeably since we published our year-ahead outlook in December. And cross-asset risk profiles have evolved as well.
In the former category, we would point to areas such as investment grade fixed income, public REITs and investment grade municipal bonds. We continue to believe these areas offer compelling fundamentals, but all three have enjoyed strong rallies that have made valuations less compelling than they were a few months ago. In the latter category, we’re seeing opportunities to add some risk and beta to portfolios by focusing on emerging markets (particularly emerging markets equities). We also continue to like high yield municipals. - Balance the public/private predicament: Many investors fear that last year’s sharp selloff in public markets is still going to come due for slower-acting private markets. And some are concerned that they may be overweight in private assets due to pricing imbalances.
From our vantage point, we do see technical risks, such as in some areas of private real estate. And we also anticipate near-term deal flow hurdles in areas such as private equity. And the failure of Silicon Valley Bank highlights the importance of dependable financing sources. But other areas within private markets look quite compelling. We’d point to private credit (particularly middle market loans) given that private credit investments typically focus on more defensive sectors and that deal structures look solid.
Significant changes in our views:
Value is emerging in emerging markets: Amid an overall preference for less cyclicality and more defensive positioning, we think it makes sense to balance this stance by taking a closer look at emerging markets. A key catalyst for this change is a better environment in China. That country is seeing improved economic growth, thanks largely to a significant policy turnaround with the end of its zero-covid stance.
Both emerging markets equity and debt investments offer more attractive valuations than they did a few months ago, and U.S. dollar strength is less of a headwind. EME investments in particular should benefit from a flexible and active approach, as correlations between countries continue to fall (Figure 1). In addition to favoring China, we also see good relative value in Mexico, Brazil and Indonesia.
Diversify credit risk exposures: We believe bond yields will moderate and gradually fall over the course of 2023. Across taxable fixed income markets, we think better opportunities exist by taking on credit risk rather than duration risk (although we still favor higher duration in municipals where ongoing inflows should support the longer end of the curve).
We see value across credit sectors, especially in high yield and loans, and would emphasize that we generally favor relatively higher quality segments within individual credit sectors. We also have a favorable view toward preferred securities. Although recent banking sector turmoil has weighed on the issuer base, it has also made valuations more attractive. Barring much more extensive financial sector contagion than we expect, we continue to see select areas of value in this space.
It may be a good time to consider taking profits in some areas and adding to risk in others.
Our highest-conviction views:
Infrastructure (+) remains a particularly favored area for us. While inflation appears to be easing, it remains a risk. Infrastructure investments (such as regulated utilities) are usually able to pass along higher costs to consumers. At the same time, infrastructure is an asset class that tends to be resilient in the face of slowing economic growth. We have a modest preference for listed over private infrastructure, as the latter may still experience some “price lag” effects as privates catch up to what happened to public markets last year.
Private credit (+) fundamentals remain sound. These investments tend to be focused on more resilient areas of the market such as health care, software and insurance brokers that are relatively well positioned to withstand economic downturns. The strong price appreciation across public fixed income markets since the end of last year also makes private credit relatively more attractive.
Treasuries (-) offer higher current yields than they did a year ago, but, simply put, we see much better places to put cash to work.
Our offices
Endnotes
Sources
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.
Nuveen provides investment advisory services through its investment specialists.
Sources
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.
Nuveen provides investment advisory services through its investment specialists.