Weekly Investment Commentary: From pain to gain: midyear outlook preview
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- What will the world look like going forward? And how should we approach the markets? Those were the key questions Nuveen’s Global Investment Committee debated at our recent conference in London. Later this week, we’ll be sharing our collective answers in the form of our midyear 2022 outlook. In the meantime, we offer this preview of our key economic, market and portfolio construction themes.
- From pain to gain. There’s no way around it: The first half of the year was painful. Nearly all asset classes suffered losses, and there were few places to hide. The bad news is the headwinds that drove markets lower are still in place: unusually high levels of inflation, slowing economic growth, rising interest rates, Fed policy uncertainty and fallout from Russia’s war on Ukraine. The good news is we see some potentially better times ahead, including more moderate inflation and (perhaps) less aggressive pace of monetary tightening. Overall, conditions will remain unsettled, but we’re cautiously optimistic that investors will begin to experience less pain and more gain.
- Slower growth? Yes. Deep recession? No. As the effects of pandemic-era stimulus fade, the global economy is gradually returning to pre-Covid norms. But the varying pace at which different sectors and regions are making progress is contributing to uncertainty and market volatility. Looking ahead, we expect a significant easing in inflation over the next 18 months amid continued central bank tightening and slowing growth. The runway for a soft economic landing has narrowed, and a mild recession isn’t out of the question. One bright spot that should grow in importance: Consumer spending remains strong, and thanks to low unemployment and high job security, is more than keeping pace with inflation (Figure 1).
“Overall, conditions will remain unsettled, but we’re cautiously optimistic that investors will begin to experience less pain and more gain.”
Our full outlook will include detailed cross-asset-class views and our best ideas across public and private assets. For now, we present these four portfolio construction themes based on the conclusions from our London GIC meeting:
- Fixed income credit sectors over equities. Although equities offer better value than they did at the start of the year, we could see negative earnings revisions in the coming quarters. We prefer to access risk-on exposure through public fixed income credit sectors, which we think represent more compelling near-term return prospects per unit of potential downside risk (see Figure 2).
- Baby steps back to duration. With recession odds on the rise and bond markets already pricing in most of the pain expected from Fed rate hikes, we firmly believe that investors who have shortened duration should consider inching their portfolios back to neutral over the next quarter, particularly as recession risk increases.
- Real assets vis-à-vis inflation. Infrastructure, farmland and commercial real estate are among the real asset categories that may provide ways to combat high inflation — or benefit from it.
- Publics poised to lead. While there’s no denying the importance and value of maintaining a strategic allocation to private assets, beaten-down public markets currently offer extremely compelling upside potential in the near term.
“Overweighting municipal bonds and corporate high yield are the GIC’s two highest conviction views.”
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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