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4Q 2019 outlook

Risks seem to be rising and investors are confronted with uneven economic growth. We’re calling for a tougher climb but we still see investment opportunities for our clients.

Play defense, but stay in the game

Late last year, Nuveen’s Global Investment Committee’s 2019 Outlook told investors to Expect a tougher climb. For the first few months of this year, that scenario didn’t really play out, as risk assets rebounded strongly from the late-2018 sell-off. But since then we’ve started seeing cracks in the system: uneven and slowing economic growth, rising trade tensions, broader political uncertainty, higher volatility and falling and even negative interest rates. These changes have of course complicated life for investors of all stripes — and they also fed into a lively discussion at our GIC meeting in September.

In many ways, most of these risks aren’t really new: We have been worrying about the pace of economic growth since pretty much the end of the global financial crisis, and since that time we’ve experienced market corrections and interest rate volatility.

But in other ways, these risks are starting to feel more acute. The rates environment in particular seems troubling, and it’s a topic we (rightfully) devoted quite a bit of time to at our recent meeting. The shifting rate environment affects everything from portfolio positioning for our equity, fixed income and alternatives portfolios to how we price private market deals. And, for sure, lower and negative rates make it tougher for our clients to find the yields they need to maintain income levels or fund their liabilities. At the same time, we’re getting the sense that political risks are growing. We’re starting to see trade-related problems work their way into the economic data for the worse. And that’s without even considering growing tensions in the Middle East or the messy Brexit situation.

So what does all of this mean for our investment outlook and — more important — investment positioning? Our main macro takeaway from our meeting is that we think economic growth will remain troubled, but we don’t see a recession over the next year. Related, we think interest rates will remain depressed for some time. And that means investors should probably expect lower returns across asset classes than they enjoyed over the last few years: There’s that tougher climb.

That’s why we are continuing with our view that it makes sense to stick with more defensive positioning across asset classes. As we said in our midyear outlook, that means things like focusing on quality defensive growth stocks, seeking more resilient yield opportunities in fixed income and looking for yield and diversification benefits throughout real assets, real estate and other alternatives. But turning more defensive is not the same thing as adopting a risk-off stance, and all of our asset class leaders and portfolio managers remain committed to being fully invested and to finding opportunities to help our clients meet their financial goals.

If one consistent investment theme clearly emerged in our last Global Investment Committee meeting, it was that selectivity matters more than ever. We broadly agree that we’re approaching the end of a very long economic and market cycle, which means the easy money has already been made. From here, investors must remain nimble, look for tactical opportunities to capitalize on volatility and construct portfolios with increasing care.


Risks seem to be rising. Investors are confronted with uneven economic growth, the increase of negative interest rates around the world and rising geopolitical uncertainty. We’re calling for a tougher climb when it comes to investing from here, but we are continuing to find multiple investment ideas for our clients.


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Endnotes
Sources: All market and economic data from Bloomberg, FactSet and Morningstar.

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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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