Weekly Investment Commentary: Are we there yet?
Bottom line up top:
- Stop us if you’ve heard this one before. Markets are navigating pricing pressures that ultimately may prove transitory. No, it is not 2021. In 2023, transitory describes recent disinflationary trends that have led to increased volatility. Fueling investor concern is a sequence of economic data, starting with January’s jolting payroll data that revealed persistent tightness in labor markets and elevated wage growth, followed by the Consumer and Producer Price Index reports that both showed higher-than-expected inflation. Combined with the upward surprise in January’s PCE data, we contend the U.S. Federal Reserve has not yet arrived at a rate restrictive enough to reestablish price stability.
- Factoring in higher rates. Volatility struck equity markets acutely over the past two weeks, given the rally of early 2023 fueled by investor optimism for a pause in rate hikes by mid-2023, at a lower terminal rate than central bankers had suggested. As a result, from a factor perspective, the biggest winners were those most sensitive to movement in risk-free rates including volatility, momentum, growth and sentiment.
As evidence mounts supporting a higher-for-longer rate cycle, performance among those factors has sharply reversed (Figure 1). We expect this vacillation in trading to continue and delaying the risk of a recession rather than eliminating it. Rather than attempt to time market gyrations, we suggest investors seek companies better suited for the uncertainty ahead.
“In 2023, transitory describes recent disinflationary trends that have led to increased volatility.”
Given the macro backdrop, we advocate for a defensive tilt that is balanced with selective beta exposure in order to protect against the downside risk of a recession, while minimizing underperformance should the global economy surprise to the upside.
In the U.S., we prefer the qualities of defensive equities, including dividend growers and infrastructure. U.S. infrastructure tends to be less cyclical and remains an attractive inflation hedge while dividend growers have historically provided total and risk-adjusted returns over full market cycles, aiding with capital preservation during challenging market environments.
Currently, we believe investors may benefit from seeking beta exposure outside the U.S., favoring emerging markets over international developed equities. Trading at approximately 11.5x their blended forward priceto-earnings ratio, emerging markets equities are attractive on a relative valuation basis and are currently forecasted to exceed their U.S. and non-U.S. developed counterparts in terms of earnings per share growth. Further supporting our case for increased emerging markets exposure is the ongoing reopening of the Chinese economy, as well as geopolitical risks that we think are less significant than investors believe.
Within alternatives, we continue to find farmland attractive. The asset class has historically provided diversification benefits and been a strong hedge against inflation (Figure 2), while providing income stability associated with longer-term leases.
“We continue to find farmland attractive. The asset class has provided diversification benefits and serve as a strong hedge against inflation.”
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
All market and economic data from Bloomberg, FactSet and Morningstar.
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Important information 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. Concentration in infrastructure-related securities involves sector risk and concentration risk, particularly greater exposure to adverse economic, regulatory, political, legal, liquidity, and tax risks associated with MLPs and REITs. 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 appropriate 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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