Nuveen’s 2022 outlook is titled “Slower. But still pretty fast”. Can you tell us more?
We think 2022 will look quite similar to 2021 — with some key differences.
- The positives: Economic reopening should continue and global economic and corporate earnings growth should be above trend.
- The negatives: Inflationary pressures have grown, interest rates are rising and fiscal and monetary support are waning.
This explains our 2022 theme. The economic cycle isn’t ending, but conditions are getting more difficult and gains are going to be tougher to come by.
What should investors do in this environment?
Our global investment committee (GIC) offers five portfolio construction themes to navigate financial markets. The first is to look for rebalancing opportunities. The key word here is “rebalancing”, but we’re aware that many investors don’t regularly rebalance, which could mean being exposed to unintended risks.
Our view is that all investors should explicitly choose and manage their portfolio exposure risks in line with their long-term goals and the prevailing market environment. Whether those are achieved via a risk-budgeting approach, diversification and asset allocation, or through asset class-specific positioning, all of these exposures should be intentional.
How can investors manage economic growth and inflation risks?
We expect global economic growth this year to be a notch slower than it was in 2021, but still above the long-term trend. And we also think inflation pressures will continue through the coming year. We expect this combination to likely result in a multi-year trend of decent growth and some upward pressure on interest rates.
Our second portfolio theme addresses these factors. When it comes to balance, investors should focus on “growth + inflation” investments rather than explicit inflation hedges.
For now, we think key elements of the reflation trade we have been discussing for some time still have legs. Fixed income credit sectors, US small cap equities and public and private real estate and real assets all look like good opportunities in a modest growth, modest inflation, modestly rising rates environment.
Where are the income opportunities?
This reflects our third theme: to widen the search for income. With ultra-low yields across traditional fixed income asset classes, investors need to expand their universe. As such, we suggest exploring different areas of the fixed income landscape, dividend-paying equities and alternatives such as real estate, real assets and private credit.
In doing so, it is critical to understand the associated risks and to be deliberate in choosing those risks. To aid this process, we broadly categorise asset classes into buckets of interest rate risk, credit risk and equity risk. Each offers a different yield and volatility profile, and we suggest investors diversify across income opportunities and risks, as shown in the chart below.
How will the evolution of responsible investing affect portfolios?
The acceleration of responsible investing themes and environmental, social and governance (ESG) factors shows no sign of slowing down. This is a good thing and ties into our fourth portfolio theme, which is to position portfolios to benefit from ESG factor investing.
The pandemic has exhibited the extent to which strong corporate governance, business continuity, human capital and supply chain management are critical to driving performance across asset classes. We do not see that changing. Likewise, climate change-related risks and opportunities are expanding across portfolios.
We are increasingly uncovering a variety of ideas in areas such as renewable energy, clean technology, food sustainability and investments that focus on diversity, inclusion and employee well-being across public and private markets.
And what is your fifth portfolio theme for 2022?
Harness active management as the cycle ages. This theme will extend beyond 2022; in the coming years, we expect rising volatility and harder-to-find investment returns. This is an implicit argument for the importance of active management.
Without exception, all members of Nuveen’s GIC and portfolio management teams are finding investment ideas that are highly idiosyncratic and fast-moving. Selectivity, research, nimbleness and confidence can make all the difference.
Five portfolio construction themes for 2022
Explore Nuveen’s expertise in income generation, alternative assets and responsible investing on nuveen.com
1 - Representative indexes: core U.S. fixed income: Bloomberg U.S. Aggregate Bond Index; U.S. TIPS: Bloomberg U.S. TIP 1-10 year Index; mortgage-backed securities: Bloomberg U.S. Mortgage-Backed Securities Index; investment grade corporates: Bloomberg U.S. Corporate Bond Index; investment grade municipals: Bloomberg U.S. Municipal Bond Index; U.S. equity: S&P 500 Index; world high dividend (HDY): MSCI World High Dividend Yield Index; U.S. REITs: MSCI US REIT Index; emerging markets equity: MSCI Emerging Market Index; direct core real estate: NCREIF Property Index; emerging markets debt: JPMorgan Monthly EMBI Index; high yield municipals: Bloomberg High Yield Municipal Index; preferred securities: BofA Preferred Stock Fixed Rate Index; senior loans: Credit Suisse Leveraged Loan Index; high yield corporates: Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index; infrastructure: S7P Global Infrastructure Index; direct lending: CDLI Total Return Index. MLPs: Alerian MLP Total Return Index. Municipal bond yields are taxable equivalent at 37% + 3.8% ACA tax rates.