2023 4Q GIC outlook: Stay in the game
Views from the Global Investment Committee
- Stay in the game
- Portfolio construction themes and our highest-conviction views
- The economy and markets: key points to know
- Our best investment ideas
- Economic growth may be slowing, but a late-cycle world doesn’t mean it’s time to move to the sidelines.
- Rather than overallocating to cash, we think investors should consider modestly extending portfolio duration.
- Additionally, we favor resilient areas of the market, including infrastructure, private credit and dividend-paying equities.
Stay in the game: Investing in a late-cycle world
Saira Malik, Chief Investment Officer
Our 2023 midyear outlook, Testing the waters, made the case for a purposeful yet gradual reentry into financial markets for risk-averse investors holding on to large amounts of cash. Today, many investors remain wary of inflation, monetary policy and a possible recession. But while these concerns continue, an important variable has changed: The economic cycle is further along, with the game clock running down. We think a winning investment strategy in this environment calls for getting off the sidelines and positioning portfolios for attractive late-cycle opportunities while they’re still in play.
It’s too soon to know whether the exact nature and timing of the cycle’s resolution will be a foregone conclusion or an odds-defying upset, but markets haven’t been shy about placing their bets and cheering (or jeering) from the stands. Over the summer and leading up to the U.S. Federal Reserve’s decision to hold rates steady in September, our outlook has differed from the consensus on two key points: (1) We believe inflation and interest rates will stay higher for longer, and (2) We don’t expect U.S. rate cuts in early 2024. For now, these views remain aligned with the Fed’s actions and rhetoric, including the possibility of one more rate hike in 2023.
This backdrop suggests a portfolio playbook highlighted by three major themes:
You can’t win if you don’t play. No team wants to forfeit a game by not showing up or by failing to put their best foot forward. And once play begins, victory is more likely if the lineup that’s best-suited to execute specific offensive or defensive maneuvers is on the field when needed most. In investment portfolios, cash can play a useful role, but we don’t think it is the ideal “go-to” asset class for achieving late-cycle outcomes.
Not all income can be scored the same way. Income generation in the current climate will likely require a number of potential contributors, starting with duration. Investors who modestly extend the duration of their fixed income allocation have the potential to lock in attractive yields given what should be a less volatile interest rate environment for the next several quarters. Additionally, generating yield in three different categories — defensive (traditional), alternative (less correlated to economic factors) and credit (greater yield per unit of risk) — allows investors to diversify income sources to meet specific portfolio needs.
Cover the entire field, naturally. Beyond certain fixed income opportunities, our favored investments for late-cycle portfolios include global natural capital. Farmland, timberland and agribusiness typically offer steady, long-term cash flows and illiquid profiles that keep them relatively insulated from short-term market dynamics. We also see compelling long-term potential in projects focused on protecting global environmental health broadly and biodiversity in particular.
The following outlook provides our more detailed investment perspectives as we enter the closing months of 2023 and prepare for the economic cycle’s final whistle, most likely to sound in 2024. Fortunately, investors still looking to transition from benchwarmer to potential benchmark-beater still have time to get their head — and their portfolio — in the game.
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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