Cross-asset views and portfolio construction from the Nuveen Solutions team
With the asset class outlooks and investment themes offered by the GIC as a key input, the Solutions team formulates views on cross asset risk-adjusted return potential over the next 12 months. Once our views are established, we then consider how these views translate into portfolio positioning for two of the most common challenges our clients face: growth and income. Given differences in time horizon and investment mandate, in some cases these views may not perfectly coincide with the broader thematic views from the GIC. We also remind investors that these ideas are meant to be incorporated in the context of a diversified, outcome-focused portfolio and not in isolation.
- The data show a healthy U.S. economy, and our risk indicators suggest a low probability of entering a high volatility regime. But there are a number of factors causing increased market uncertainty in 2019, and we think investors can modify their equity and fixed income allocations to seek improved outcomes.
- We favor the defensive nature of U.S. large cap growth versus the cyclicality of U.S. large cap value. We also have a bias toward U.S. small caps given current valuations. Outside of the U.S., we prefer emerging markets vs. developed markets. EM should benefit if the Fed adopts a more gradual tightening pace and if the U.S. dollar weakens.
- We expect the 10-year U.S. Treasury yield will remain range bound (3% to 3.25%) over the near future. With limited upside in long rates, we are upgrading U.S. aggregate bonds to neutral. Non-U.S. developed fixed income markets remain unattractive given current yield levels and asymmetric risk/return profiles.
- With credit spreads compressed, we don’t believe that investors are being adequately compensated for the risks in U.S. high yield and leveraged loans. EMD offers attractive yield and, like EM equity, should benefit from dollar weakness and a more dovish Fed. We expect high yield municipal bonds to outperform their taxable equivalents given a steeper municipal yield curve and a continued decline in municipal bond issuance.
- While the U.S. housing cycle is advanced, higher quality core properties should provide stable income and act defensively in a portfolio. Higher rates have caused us to increase our return forecast for middle market loans; seniority in cap structure should lead to better outcomes than public loans in the event of credit market weakness.
For growth-oriented investors
- We retain a neutral position in global equities in growth-oriented portfolios given heightened market uncertainty.
- Within U.S. equities, we favor growth over value within large cap. Additionally, we prefer small cap over large cap.
- We are more favorable on emerging markets equities relative to non-U.S. developed markets due to the better long-term growth prospects.
For income-oriented investors
- Within fixed income, we see heightened risk in U.S. corporate credit markets over the next 12 months, and are now less favorable on U.S. high yield and leveraged loans. We remain neutral on duration.
- Emerging market debt is historically attractive from a yield perspective. Potential U.S. dollar weakness in 2019, caused by a more dovish Fed, could provide a tailwind.
- High yield municipals can act as a strong diversifier, and remain attractive from a tax-exempt yield standpoint.
The views above are for informational purposes only and relate to cross-asset views only (a comparison of the relative merits of each asset class based on the Solutions Team’s assessment). These do not reflect the experience of any Nuveen product or service. Upgrades and downgrades reflect quarterly shifts in these views.
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.
Nuveen, LLC provides investment advisory services through its affiliates.