2023 midyear GIC outlook: Testing the waters
Views from the Global Investment Committee
- Testing the waters
- Portfolio construction themes and our highest-conviction views
- The economy and markets: key points to know
- Our best investment ideas
- Still-high inflation, fear of stagnation, rate equivocation cause uncertainty. Investors are keeping cash on the sidelines.
- Hesitation or delaying rebalancing are rarely winning strategies. Waiting for greater clarity has risks of its own.
- What’s more compelling than cash? We see opportunities in select areas of equities, fixed income, real estate and real assets.
Testing the waters: From waiting it out to wading in
Saira Malik, Chief Investment Officer
Our previous outlook, Caught in a holding pattern, likened the quandary of investors seeking a place to put their money to the plight of a plane circling until cleared to land. A similar sense of delay persists today. Many wary market participants are sitting on high levels of cash and cash equivalents. Their rationale: Better to stand safely on shore — and earn what looks like a decent yield in today’s higher interest rate environment — than risk swimming in choppy and uncharted waters.
But when does an abundance of caution turn into missed opportunity? How long is too long to wait for a return to “normal”? And what, exactly, will normal look like across economies and markets?
Inflation stands front and center in this discussion. Historic rate hikes from the U.S. Federal Reserve and other central banks have helped bring inflation down considerably from its 2022 peaks. Even so, inflation in most areas of the world still exceeds the long-term 2% target set by policymakers — potentially signaling that inflation has become structurally higher.
The era of ultra-low interest rates is also clearly behind us. Rates continue to hover at relatively lofty levels, and the Fed is not yet poised to pivot from its tightening trajectory. Staying the Fed’s hand is a resilient labor market with persistently solid wage growth and what may be structurally lower unemployment. Meanwhile, the Fed’s still-hawkish tone has many investors assessing if and when the U.S. will fall into a recession. Growing concern that the dominance of high-flying technology stocks has made this year’s U.S. equity market rally too narrow for comfort is also fostering reluctance to participate.
Investors daunted by this uncertain environment needn’t — and in our view, shouldn’t — stay on the sidelines indefinitely. We suggest a judicious approach to putting cash back to work, focusing on these key tenets:
Dip a toe in first. Water safety specialists recommend gradually wading into a body of water versus diving right in. The same principle applies to investment markets that appear too murky or volatile for full immersion. Investors seeking a yield advantage without plunging into full risk-on mode should consider select areas of the broad bond market, including municipals.
Explore international waters. We continue to see opportunities in emerging markets equities given attractive valuations, the weaker U.S. dollar and looser monetary policy in China. In credit markets, Europe may provide an edge over the U.S. given the strength of the region’s banking system. We’re also identifying ample investment ideas in infrastructure, real estate and other real assets across the globe.
Find an oasis in real estate. The harsh glare of headlines about the beleaguered office sector has created the mirage that all real estate assets should be avoided. But closer scrutiny reveals true pools of potential, particularly in the industrial and multifamily sectors.
The following outlook includes our more detailed map of the economic and market landscape at midyear 2023, with directions to investment destinations where the water may prove warmer and more inviting than in others — provided swimmers exercise caution and stay aware of their surroundings.
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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