From stability to agility: nine implications for a new investment landscape

Most institutional investors agree we have entered a period of elevated macroeconomic and geopolitical uncertainty, according to Nuveen’s 2024 EQuilibrium survey.

While nearly half of institutional investors surveyed are focused on improving their flexibility and adjusting their regional allocations, most are overlooking key strategies that we believe will lead to greater portfolio resilience.

Nuveen identified nine themes investors should consider to enhance portfolio resilience and adapt portfolios for the new investment landscape.

1. Reframe resiliency after decades of distortion
Investors should use caution when relying on forecasts derived from relationships that were dependent on the conditions that existed during the great moderation These conditions are highly unlikely to repeat. Going forward, it is likely that the strategies that were laggards during the era of loose money will play a more constructive role in diversified portfolios.

2. Private markets are not compelling just because they are private

Investors looking to move into private markets should keep the following dynamics in mind: 1) product wrappers are not a feature of economic exposures or risk, 2) private assets do not strengthen or add diversification to a portfolio simply because they are private and 3) some private market investment exposures are easily and cheaply accessed publicly.

Investors should focus on the idiosyncrasies that private markets deliver, often derived from unique investments not replicable in public markets, such as deal sourcing, operational improvements and structuring expertise.

Institutional allocation plans across alternative asset classes

3. Appreciate the scarcity value of real assets
Many of the underlying risk factors that drive the value of real assets are unique. These idiosyncrasies, when combined with supply limitations, enable real assets to retain their portfolio diversification benefits in a post-moderation world where heavily financialised assets may have lost some luster.

Real assets provide diversification in a post-moderation world

4. Be active where you can have the greatest impact
In a world of heightened macro variability, the unintentional risk and return drift incurred by holding asset allocations constant will likely be much larger. Expected risks and returns, which are driven by a common set of macro factors, are changing. This warrants a more active asset allocation.

5. Beware the declining utility of global cap-weighted allocations
From a portfolio construction perspective, global market capitalisation-weighted indices will likely be sub-optimal vehicles to achieve geographic diversification. Instead, investors can more effectively build their geographic allocations by placing a greater weight on the economic forces that drive a country’s or region’s market risks and return. Incorporating geopolitical factors such as rule of law, military prowess, strong property rights, access to innovation, advanced financial markets, capitalistic tendencies and plentiful natural resources will further aid in fine-tuning geographic allocations.

6. Respect the limits of central banks’ power to control inflation
While monetary policy may be effective to control inflation in the short-term, investors should be mindful that inflation is not solely a function of central bank behavior over the long term. Four structural trends will impede global central banks from achieving their low targeted rates of inflation: de-globalisation, energy transition, aging demographics and deficit spending.

7. Artificial intelligence (AI) is a double-edged sword when it comes to inflation
Despite AI’s enormous potential as a productivity enhancer, investors should not take for granted that it will completely offset the wide range of inflationary tailwinds mentioned above. The massive amount of computing power required for AI’s ongoing expansion will consume exorbitant amounts of materials, physical space and energy — real-world inputs that are in limited supply.

8. Rethink the role of government bonds in portfolios
It may be more appropriate to view government bonds as risk assets rather than diversifiers. Although they are mostly free from default risk, developed market government bonds are not free from interest rate risk. Even long-term investors should evaluate whether they are duly compensated for the risk they bear, particularly when term premiums are depressed.

9. Do not take more risk than you need
Now that the risk-free rate has reset higher, targeted returns can be achieved with less risk. Today’s environment creates a greater need to adopt a more nuanced approach to diversification and risk management, as well as a more dynamic approach to strategic asset allocation. Analysing portfolio risk factor exposures will become increasingly important in the new regime.

To learn more, visit Nuveen's Equilibrium hub or download the full version of “From stability to agility: nine implications for a new investment landscape”.

_{Important Information
Past performance is not a guide to future performance. Investment involves risk, including loss of principal.  The value of investments and the income from them can fall as well as rise and is not guaranteed.} 

_{Private equity and private debt investments, like alternative investments are not suitable for all investors given they are speculative, subject to substantial risks including the risks associated with limited liquidity, the potential use of leverage, potential short sales, concentrated investments and may involve complex tax structures and investment strategies.}

_{This information does not constitute investment research as defined under MiFID.}

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