Best ideas across asset classes
Asset class outlooks
- As has been the case for some time, our most-favored area is dividend-growers, which tend to be high-quality companies that have strong free cash flow levels and solid profit margins.
- This area of the market also offers consistent income and tends to be less susceptible to volatility.
We remain neutral toward public equities, although differentiation is growing within and across markets. Stocks have rallied over the last few months, thanks in part to diminishing recession fears, but a narrow slice of the technology sector has driven much of the increase. We’re not ready to call an end to the rally, but the headwinds of high interest rates, persistent inflation and geopolitical uncertainty create risks. Equity valuations looked rich even before the rally, and we are wary of possible earnings deteriorations. Continued volatility is likely, and we favor overall defensive positioning combined with select risk taking.
Our defensive focus leads us to prefer listed infrastructure and U.S. large cap stocks, especially dividend-growers and high-quality growth companies within tech industries like software and semiconductors. As for risk taking, we see opportunities in select emerging markets that feature relatively attractive valuations, improving earnings and a potential boost should the U.S. dollar weaken. Brazil and Mexico are particularly appealing, based on valuations and a better inflation outlook.
In contrast, we’re less favorable toward non-U.S. developed markets, many of which are still hiking interest rates and facing economic weakness (Germany is already in a recession). Additionally, we’re not yet comfortable enough to upgrade our view on U.S. small caps, although this segment tends to perform well coming out of a recession.
As discussed in our portfolio construction views, we see more value and opportunities within private equity and expect deal volume to climb in the coming quarters.
- Our highest-conviction themes center around a flexible and diversified multi-sector approach, with a view toward modestly extending duration and focusing on higher-quality credits.
- For municipal bonds, we see compelling opportunities in both high yield credits and bonds with maturities greater than 15 years, which appear relatively undervalued.
Fixed income markets overall appear attractive. Although some areas of the world will still likely see rate hikes, we think the U.S. is approaching or at the end of that cycle. We expect improved stability as yields enter a less volatile trading range before the Fed begins easing in the second half of 2024. As such, current yields represent a relatively attractive entry point and investors may consider extending duration to create a more durable yield profile.
We are growing more wary about spread levels and favor higher quality segments of the credit market. We anticipate credit spreads will widen over time, when it would make sense to add credit risk, but we don’t expect that will occur for the next several months.
Our overall portfolio focus is on flexibility and diversification across credit sectors versus over- or under-allocating to any one area. Within that context, we favor investment grade bonds and see value in senior loans, which offer attractive spread levels compared to other credit sectors. We also see value across securitized credit and select emerging markets debt regions experiencing more advanced hiking cycles and solid economies. For high yield, we continue to favor the BB area of the market, but believe that the strong rally and corresponding spread tightening has made valuations look more fair.
Municipal bonds remain very healthy. Fundamentals and technical conditions are solid, and the longer-duration profile of municipal bonds should be a tailwind if rates are near their peak. We are generally focused on longer duration across the municipal yield curve and see value in taking on credit risk thanks to the solid backdrop.
We remain highly constructive toward private credit markets, especially if the recession that may be looming turns out to be shallow or mild, as we currently expect.
- 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.
Although the doom-and-gloom headlines surrounding real estate markets continue to create noise, we believe the headwinds facing private real estate are fading. We continue to observe signs of distress, especially in the office sector. But we also see positive signals: Buyer interest is growing as rates look more stable in the months ahead, and real estate valuation losses are moderating. Fundamentals remain sound, and we expect negative technicals will improve over the coming quarters.
We continue to favor real estate debt over equity, as the interest rate environment appears to be stabilizing and lenders retain pricing power.
U.S. medical offices enjoy low vacancy rates, limited supply availability and tailwinds from an aging population. We also like the senior housing sector, especially in markets like the U.S. and Japan, where demographics are favorable and new construction levels are low.
Public & private real assets
- In public markets, our best ideas in infrastructure are pipelines and waste management companies; in real estate, we favor gaming, shopping center and senior housing-focused REITs.
- In private markets, we continue to focus on investments that align with climate transition, such as clean energy and renewable fuel sources, as well as strong global demand for protein and healthy foods.
Nuveen’s Global Investment Committee has emphasized public infrastructure for some time. In addition to the benefits of predictable cash flow and the ability to withstand a potentially weaker economy, this area of the market has lagged public equities this year, making prospects even more compelling. We’re more confident of opportunities in Europe given encouraging developments related to war, energy and politics, and we also see still-strong fundamentals in North America (especially in the waste and pipeline sectors). Importantly, the yields and good credit characteristics of high-quality debt and preferred securities issued by infrastructure companies should allow them to outperform if the economy slows.
We remain favorable toward public real estate, especially considering its underperformance — and resulting attractive relative valuations — on the back of rising interest rates. Real estate fundamentals remain strong in most sectors, with especially bright outlooks for gaming REITs, senior housing, shopping centers and data centers. We’re less constructive on the office sector.
Private infrastructure continues to benefit from solid fundamentals and supportive government policy. We prioritize assets with growth profiles that can better withstand discount rate changes and repricing. Of particular interest are clean energy generation and storage, infrastructure services in the transportation sector, and certain digital infrastructure assets.
Farmland is also an area of focus. We especially like crops supporting biofuels, where prices are climbing due to increasing demand (especially from China) and ongoing shortages caused by the Russia/Ukraine war.
All market and economic data from Bloomberg, FactSet and Morningstar.
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Important information 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. 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. Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market.
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