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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