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Macro outlook

Midyear Outlook: Asset class outlooks

Global Investment Committee
Bringing together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets
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Asset class outlooks


Equities: Looking for quality across the board

Saira Malik, CIO, Head of Global Equities
Best ideas

Opportunities and positioning
Our key focus is on finding quality across geographies, sectors and industries. We have a strong bias toward companies with high levels of free cash flow that have the ability to reinvest in their businesses and return value to shareholders.

Since the market low in March, stocks have experienced a significant recovery, led by large caps and growth styles (in particular, mega cap technology companies). We think growth will continue to benefit over the long term, given a persistent environment of relatively slow economic growth. But value, cyclical sectors and small caps enjoy better relative valuations and could be due for a near-term bounce, especially if global economic reopening accelerates. We also favor companies with the ability to grow dividends that should remain well positioned as global yields remain extremely low.

ESG-focused companies have been outperforming, and we expect this trend to continue. ESG companies tend to be higher quality, and we have a particular focus on those able to withstand regulatory scrutiny.

New private equity deals have been virtually nonexistent in recent months. For existing entities, we favor those that have been highly defensive— shoring up liquidity and strengthening balance sheets.

Looking ahead, we think certain industries will experience notable longterm changes, both for the better (increased spending on health care and online shopping) and for the worse (companies in the “sharing economy,” such as rideshare and office sharing companies) that will have significant investment implications.

Risks to our outlook
The current valuation premium of growth styles over value presents some near-term risks for investor positioning. When value styles pop, they tend to do so quickly and dramatically. We think investors should continue to hold quality value investments within their portfolios.

We are also concerned about unknown outcomes from the 2020 U.S. elections that could result in higher taxes or a more stringent regulatory backdrop, which would be a negative for stocks.


Taxable fixed income: Leaning more into some higher-risk areas

Bill Martin, Head of Global Fixed Income, Chief Investment Officer
Best ideas

Opportunities and positioning
Aggressive central bank action has successfully improved market liquidity and supported credit sectors. But by moving interest rates to zero, the Fed and others have also complicated what was already a difficult proposition: finding yield and income.

We advocate a generally neutral position when it comes to duration, and think investors are better served finding income opportunities by selectively taking on credit risk. We are looking for credits with durable free cash flow and solid balance sheets across a variety of areas, including investment grade corporate credit, mortgage- and assetbacked securities, preferred securities and emerging markets with a tilt toward dollar-denominated debt.

We have a more cautious view toward more levered issuers and sectors more directly affected by the pandemic, such as high yield and leveraged loans as broad asset classes. But we are finding idiosyncratic opportunities here, especially in select non-energy and higher-quality areas of the high yield market.

For the most part, we believe valuations in sectors most impacted by the virus, including the energy, travel, leisure, retail or restaurant industries still face a tough road ahead.

Focusing on ESG factors remains important, especially when it comes to the “S.” We are seeing good performance in companies with stronger employment stability and more robust issuance in social bonds domestically and abroad.

Private credit markets have held up relatively well, with negative coronavirus-related pressures mostly confined to travel, trade and leisure industries such as aircraft leasing, ports, airports and stadiums.

Looking ahead, we expect more fiscal and monetary stimulus across the globe. The Fed is set to maintain rates at zero for years. We also think inflation will remain contained for now and expect the U.S. dollar to weaken only modestly as we emerge from this recession.

Risks to our outlook
Given our focus on leaning modestly into higher-income areas of the market, the main risks to our outlook would be a resurgence in coronavirus cases that cause further economic disruption, a real or perceived policy mistake or a worsening in geopolitical conditions, such as flare-ups in the U.S./China relationship.

We expect volatility will remain high across global fixed income markets, which means tactical opportunities must be captured quick.


Municipals: Municipal market healing should persist

John Miller, Head of Municipals
Best ideas

Opportunities and positioning
It’s not an exaggeration to say that March 2020 was the worst month in history for the municipal bond market. We saw massive outflows as returns plummeted. And municipal-to-Treasury yield ratios rose to levels far exceeding the 2008 financial crisis.

We felt the dislocations reflected more investor fear and panic than reality, as municipal fundamentals remained relatively healthy. Since March, the municipal markets have started to heal as investors have broadly come around to this view as well.

Technical conditions have improved significantly since March, as demand has risen, liquidity has stabilized and municipal markets have benefited from Federal Reserve policies and fiscal stimulus. As a result, returns on higher-quality municipals have turned positive and AAA-municipal bond yields are lower than when the coronavirus crisis began. In our view, these trends are likely to continue, and we expect future stimulus measures to provide more direct financial support for state and local governments.

In particular, we expect better conditions for high yield municipals. High yield credit spreads remain wider than the start of the year, reflecting an ongoing liquidity premium. And default rates should be relatively well contained. That means prices should catch up to fundamentals, in keeping with the municipal market’s long history of resilience.

The land-secured and charter school sectors contain selective opportunities, but we are less positive on areas such as continuing care retirement communities and nursing homes.

We are also seeing value in higher-quality municipalities and projects focused on clean water, recycling and food resourcing, reflecting our ongoing commitment to responsible investing practices.

Risks to our outlook
Inflation is always a risk to municipal bond investors, and the massive monetary easing plus fiscal stimulus and deficits would normally be of great concern as they lead to inflationary risks. However, given the current crisis and economic challenges, we believe inflation will be well contained for at least the next few years.

We are also closely watching for signs of a resurgence in coronavirus cases that could cause economic and market dislocations. The good news, though, is that there is a growing differentiation between coronavirus cases, which could occur, and new economic shutdowns, which appear much less likely. In addition, policy support should keep market liquidity functioning smoothly in most scenarios.


Real estate: Coronavirus is accelerating existing trends

Mike Sales, CEO of Nuveen Real Assets and Real Estate
Best ideas

Opportunities and positioning
Massive global fiscal and monetary stimulus is helping investor sentiment to recover, but we expect the economic recovery to be slow, uneven and highly different among regions, cities, property types and sectors. In particular, we believe technology, health care and housing look attractive compared to traditional office and retail, as these property types rely less on economic growth to generate net operating income.

We do not believe the coronavirus pandemic is resulting in a paradigm shift. Rather, it is causing existing trends to accelerate: Online shopping is growing faster at the expense of traditional brick-and-mortar retailers, financially weak properties and business operations are being pushed into default and bankruptcy at a quicker pace and households are accelerating their migration to suburbs and Sunbelt cities.

ESG-focused investing has also grown in importance. We are increasingly less favorable toward areas such as the fossil fuel industry in favor of real estate investments focusing on tenant health (e.g., better air quality) and environmental factors (low carbon footprint). More broadly, we are also focusing on cityspecific risks around climate change and income inequality.

Tactically, we are looking to take advantage of near-term price dislocations. For example, we would not typically consider mortgages and preferred equity in the lodging sector due to its volatility, but that area could represent attractive value.

Finally, we continue to focus on “global cities” that are benefitting from demographic and technology advantages, and we also like the long-term case for housing, industrial, technology and health care properties.

Risks to our outlook
While we don’t expect it will happen, economic conditions could deteriorate, driving a wave of bankruptcies among small businesses and higher-yield companies. We are also concerned about possible supply chain disruptions and increased protectionism around the world that could hurt trade-related properties such as warehouses.

We are also focused on the future of office space and expect many office tenants will look to cut costs by reducing their real estate footprints.


Private and public real assets: Investing with a defensive tilt

Justin Ourso, Senior Managing Director, Head of Nuveen Real Assets
Jay Rosenberg, Head of Public Real Assets and Portfolio Manager

Best ideas

Opportunities and positioning
Across public and private real assets, we are focusing on more defensive investments. Although the global economy appears to be recovering, we expect growth to be slow and uneven. This could benefit investments with reliable cash flows that may be more insulated from short-term economic trends.

In general, an environment of lower interest rates remains a plus for most real assets. Additionally, while we are not expecting near-term inflationary pressures, real assets can also provide a valuable inflation hedge.

In public real assets, assets less exposed to social distancing and companies with healthier balance sheets and better liquidity have been outperforming. We expect this trend will continue.

In public real estate, we prefer the logistics, data centers, retail with essential anchors such as grocery or drugstores, single-family rental and lab space. We also like properties that have long-term leases with financially sound tenants (e.g., government employees). We are less positive on lodging, enclosed malls and office and residential properties in high-priced urban centers.

In public infrastructure, we are focusing on regulated, less cyclical exposure such as utilities and opportunities in technology-driven industries like cell towers and data centers over areas such as transportation.

Private real asset investments such as agriculture, timberland and certain infrastructure sectors (particularly digital) have been relatively well insulated from economic upheaval given the essential nature of food, fiber and services. U.S. farmland rents and values, as an example, have been relatively stable and seasonal conditions, including rainfall, in Australia have been a positive following a multiyear drought.

Across private real assets, we are increasingly focused on the resiliency of supply chains, customer bases and the possibility of increased trade disruptions. For instance, we prefer U.S.-based agribusinesses with a domestic consumer focus.

Finally, ESG themes offer value across real assets, including food sustainability, carbon sequestration and investments focused on employee/customer well-being. Additionally, solid opportunities exist across impact investing themes, with a focus on affordable housing, inclusive growth and resource efficiency.

Risks to our outlook
Rising interest rates would work against defensive positioning in the public real asset space. Likewise, stronger-than-expected growth would be a risk.

In contrast, a prolonged worse-than-expected economic environment could be a negative for global demand in areas such as solid wood product demand, commodities and energy-related infrastructure.

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All market and economic data from Bloomberg, FactSet and Morningstar.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

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.

Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs). The float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization, is disseminated in real-time on a price-return basis (AMZ) and on a total-return basis (AMZX). Bloomberg Barclays High Yield Municipal Bond Index is an unmanaged index consisting of noninvestment-grade, unrated or below Ba1 bonds. Bloomberg Barclays Corporate High Yield 2% Issuer Capped Index measures the USD-denominated, high-yield, fixed-rate corporate bond market and limits each issuer to 2% of the index. 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 prerefunded bonds. Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage-backed pass-through securities. Bloomberg Barclays U.S. TIPS Index is an unmanaged index that includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value. Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies. Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the $US-denominated leveraged loan market. BofA Merrill Lynch Preferred Stock Fixed Rate Index is designed to replicate the total return of a diversified group of investment-grade preferred securities. S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities. JPMorgan Emerging Market Bond Index tracks the performance of bonds issued by developing countries. MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. MSCI US REIT Index is a free float-adjusted market capitalization weighted index that is comprised of Equity REIT securities. The MSCI US REIT Index includes securities with exposure to core real estate (e.g. residential and retail properties) as well as securities with exposure to other types of real estate (e.g. casinos, theaters). MSCI World High Dividend Yield Index targets companies with high dividend income and quality characteristics and includes companies that have higher than average dividend yields that are both sustainable and persistent. NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. S&P U.S. Treasury Bond 1-3 Year Index is designed to measure the performance of U.S. Treasury bonds maturing in 1 to 3 years. S&P U.S. Treasury Bond 7-10 Year Index is designed to measure the performance of U.S. Treasury bonds maturing in 7 to 10 years.

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. 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 exclude 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 provides investment advisory services through its investment specialists.