Staying invested as risks rise
Throughout 2018, Nuveen’s Global Investment Committee (GIC) suggested clients remain in a risk-on mode, even as we pointed to rising risks to our pro-growth outlook. We haven’t substantially changed our views that select opportunities still exist across markets, but we do acknowledge that conditions are likely to get more challenging from here.
We have been adjusting some of our portfolios to prepare for a more defensive environment but remain hyperaware of a critical point: Market conditions may shift, but our clients’ long-term investment objectives typically do not. So our 2019 GIC Outlook, Expect a tougher climb, attempts to answer a key question: How can we and our clients stay invested as the world gets tougher? (The short answer: Stay actively invested.)
We’ll start with the good news: We think global growth will slow in 2019, but we don’t believe the world’s major economies will enter recession. At the same time, we think financial conditions will be tighter around the world as interest rates rise and as we see growing trade restrictions. Important clarification, however: Slower growth and tighter financial conditions do not mean a “risk-off” world. At least not yet.
Likewise, as you’ll see in the following sections, our most senior investors think valuations for many risk assets (specifically equities and some fixed income credit sectors) are more attractive now than they were when we started 2018: Interest rates have risen, yields have climbed, credit spreads have widened and equity valuations have fallen. That creates opportunities.
As a result, in most cases our investment leaders are expecting modestly better returns across asset classes compared to what we saw in 2018. We are continuing to find good investment ideas across public and private markets. In sum: 2019 is likely to be a balancing act. Our investment teams are focused on finding opportunities to buy and own high quality assets—without becoming too defensive in their approach.
At our recent GIC meeting, however, we also spent quite a bit of time asking the question: What if we’re wrong? What happens if growth slows more than we expect or if geopolitical issues (such as rising trade restrictions or a messy Brexit) worsen? As stewards of our clients’ assets, we believe it is our obligation to ask these sorts of questions and find ways to prepare our clients’ portfolios for possible downside risk. We are looking more closely at defensive growth names in our growth equity portfolios—without undertaking a major rotation into “value” or other sectors. And we are focusing on higher credit qualities in some of our fixed income portfolios.
So what to expect in the New Year? Overall, we suggest our clients strike a balance between optimism and being defensive, to approach markets cautiously but remain invested and, above all, to work with an investment manager who has the tools, insights and flexibility to manage through what could be a challenging 2019.
We’d love to hear your views as well. We welcome the opportunity to talk about your portfolio goals and challenges and how we can better help you meet your goals. We encourage you to contact your Nuveen relationship manager with any feedback.
Data Source: FactSet and Bloomberg for market and economic data
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. Past performance is no guarantee of 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.
The Bloomberg Barclays Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. The Bloomberg Barclays High Yield Corporate Bond Index is an unmanaged index considered representative of non-investment-grade bonds. The MSCI ACWI (All Country World Index) is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Nuveen’s Third Annual Responsible Investing Survey: Nuveen commissioned Harris Poll and was conducted online from June 1 - 27, 2017 among 1,012 affluent investors. (U.S. residents over age 21 with $100,000 in investable assets (excluding workplace defined contribution accounts or real estate), who consider themselves the decision maker for financial decisions and who currently work with a financial advisor). A covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out. Algorithmic trading refers to automated trading by computers which are programmed to take certain actions in response to varying market data. Alpha is a measure of performance on a risk-adjusted basis. Middle market refers to medium-sized businesses (neither small nor large).
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. Foreign 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 excludes 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 suitable 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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