Like a massive dark cloud blotting out the sun, could the doom and gloom surrounding the market stay with us longer than expected?
Saira Malik, chief investment officer at American asset manager Nuveen, highlights a “worsening disconnect” between hard economic data and investor sentiment.
The market is behaving illogically, says Malik in Nuveen’s 2Q2022 global market outlook. “Despite positive signals — powerful job creation, a steady drop in the unemployment rate and consumer resilience, to name a few — markets often behaved as if the only messages getting through were fragmentary soundbites on a doom and gloom wavelength.”
While genuine risks should not be ignored, Malik is careful not to add fuel to the ongoing fire. “The combination of higher inflation and modestly decelerating growth that has characterised the past several months does not herald a return to 1970s stagflation. Lack of nuance in coverage of hot topics like these creates static that can interfere with calm, fact-based decision-making.”
She adds: “Cutting through the noise is essential, especially during times of heightened turmoil.”
Recession? Not this year
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First, the good news. Save for a “major policy error or additional exogenous shock”, Nuveen does not see growth turning negative in 2022, contrary to what some of the more pessimistic forecasters have said.
“Risks of a premature end to this young cycle have admittedly increased, given the steep path of interest rate increases we’re already seeing,” writes Brian Nick, Nuveen’s chief investment strategist.
Nick thinks the S&P500 could hit a new all-time high before the year ends, “thanks to solid earnings growth”. The index reached its historical peak of US$4,818.62 ($6,612.91) this January. As at April 22, the index is trading at US$4,271.78.
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However, Nick warns of elevated market risks. “While most asset classes are currently trading at their most attractive valuations in several years, low interest rates and high P/E ratios still do not compare favourably to the prior decade. This means return expectations should be somewhat subdued compared to the 2010s.”
Equities have actually done quite well when policy tightens
Most major economies likely saw the peak of both headline and core inflation back in March, says Nick.
From here on out, prices of goods “are likely to fall outright” and wage pressures show signs of easing. “Disinflation would be welcomed by policymakers and investors alike.”
Although falling inflation seems to go hand-in-hand with falling interest rates, Nick expects 10-year government bond yields to rise further from here. “While rates are already up considerably — and by much more than we expected — this is mainly due to higher inflation expectations. We expect real rates to rise as policy turns more hawkish and inflation moderates, producing slightly higher nominal yields by the end of the year.”
Positioning across assets
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Nuveen’s outlook for global equities remains moderately bullish, writes Malik. “Valuations have improved since the beginning of the year and corporate earnings, while decelerating, are still strong.”
US large-cap equities look attractive, says Nuveen’s Global Investment Committee, especially after their recent selloff. “The US is still trading at a premium compared to international equities, offering investors a relative safe haven from geopolitical and economic disruption.”
Growth stocks are looking more attractive and are well-positioned as economies slow, while value stocks could benefit from still-high inflation, says Malik.
Inflation-adjusted returns on US$100 initial investment and return rates p.a.
Emerging markets offer a better opportunity, thanks to better valuations and the balance of geopolitical risks, says Malik. “We think China, Brazil and, to a lesser extent, Indonesia are worth exploring.”
She adds: “From a sector perspective, energy continues to top our list, despite outsized gains this year and ongoing turbulence in the oil and gas markets, as demand remains healthy and supply is still constrained. We also favour the technology sector, especially in the US, which has become more attractively valued and offers some defensive characteristics.”
Regarding real assets, Justin Ourso and Jay Rosenberg of Nuveen’s Global Investment Committee continue to see good opportunities in US retail REITs. “[They] are benefiting from good leasing activity and appear attractively valued.”
Ourso and Rosenberg highlight renewable energy and transportation-related infrastructure as well as agriculture investments benefiting from rising demand for timber and carbon sequestration. “We see opportunities in transmission and renewable energy investments. Across private real assets, we favour investments that align with climate transition themes such as carbon sequestration in natural resources, clean energy, renewable fuel sources and continued strong global demand for healthy foods.”
Meanwhile, private real estate investments have been “relatively insulated” from recent market volatility, says Carly Tripp of Nuveen’s Global Investment Committee. “We believe continuing global economic reopening and strong capital flows should provide ongoing tailwinds.”
Tripp also sees idiosyncratic opportunities in distressed retail real estate, “especially in the US but also in Europe”. “New store openings, increased foot traffic, good leasing activity and compelling prices are all causing us to take a close look.”
Finally, Tripp continues to see value in alternative real estate sectors, including senior living housing, medical offices and industrial properties.
The demand for private equity deal financing shows no signs of slowing, says Nuveen. “In fact, committed-but-unallocated global private equity capital stood near all-time highs at US$1.78 trillion in February as institutional investors continue to embrace the asset class as a potential antidote for lower long-term return expectations.”
Overall, Nuveen favours long-term inflation protection in productive, cash-flow-generating assets, such as equities, real estate and real assets. “While broad global equities have an outstanding track record of growing real, after-inflation wealth, the profit outlook for certain sectors and regions has improved dramatically against the backdrop of elevated commodity prices and more persistent inflation.”
Photo and charts: Bloomberg
