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Investment outlook
Portfolio construction themes
Section 2: Portfolio construction themes
Markets started pricing in a likelihood of Fed rate cuts nearly one year ago. And now that central bank policy has finally shifted, investors are focusing on whether the U.S. and global economies are heading for a recession. At the same time, many wonder how the evolving rates environment will affect markets and the potential impact of the upcoming U.S. elections. To be sure, there are a lot of unknowns, but we still believe that there are also a number of strategies for investors to construct portfolios that balance different risks, provide diversification and find opportunities as the global macroeconomic environment evolves.
Asset class “heat map”
Our cross-asset class views indicate where we see the best relative opportunities within global financial markets. These are not intended to represent a specific portfolio, but rather to answer the question: “What are our highest conviction views when it comes to putting new money to work?” These views assume a U.S. dollar-based investor seeking long-term growth and represent a one-year time horizon.
Key portfolio themes
- Find a happy medium between the tortoise and the hare. Markets started pricing in rate cuts at subsequent Fed meetings way back in December 2023. Investors who shifted investments to overly defensive areas they believed would benefit from falling rates have little to show for their efforts today.
Over the past year, we cautioned against attempting to time rates. Instead, we advocated taking advantage of historically high bond yields across credit investments, rebalancing back to strategic allocations and diversifying with real assets. Similarly, we now caution against becoming overly conservative in advance of a likely economic slowdown. Overall, as our heat map indicates, we continue to see value in a mostly risk-on positioning (with important caveats).
For fixed income, we believe markets have already priced in the new environment of rate cuts. As a result, we suggest overall neutral duration positioning and generally prefer fixed- over floating-rate areas of the market. Regarding specific credit sectors, we remain generally unfavorable toward investment grade corporates. Spreads look tight and duration profiles are longer than we prefer. In contrast, we upgraded our view of securitized assets, which offer compelling value and feature spreads wider than their historical average. While senior loans can perform well when rates are falling, their floating-rate nature makes them slightly less attractive than high yield bonds (where investors can still lock in relatively high fixed rate yields).
When it comes to equities, we think U.S. large caps offer a good mix of defensive and growth characteristics, and among other developed markets we see opportunities in Japan. For investors looking to take on additional risk, we favor select emerging markets equities over U.S. small caps, which tend to underperform in advance of a recession. Additionally, we encourage investors to consider increased diversification across alternatives, private markets and real assets to broaden exposure to sources of risk. Public and private infrastructure and public real estate appear compelling. Private real estate looks to be on the rise, and we see opportunities in private credit and farmland. - The private credit run isn’t over yet. The volume of assets pouring into private credit in recent years (as well as strong returns) has caused many investors to wonder if the run is over. Our short answer is no. While we generally prefer fixed rate investments at this point, private credit is a notable exception. Investor interest remains high, demand is strong, deal volume continues to rise and we expect M&A activity to increase, which should act as a continued tailwind. We also think some private credit transactions should be able to increase leverage ratios as interest rates decline, which could make these deals more compelling. Lower interest rates should also improve debt service coverage ratios of businesses.
Given our expectation of slowing global economic growth, we suggest focusing on more defensive positioning within private credit. We favor companies with strong cash flow generation and pricing power, and believe middle-market, service-oriented businesses represent a particular sweet spot. It is reasonable to be somewhat wary of private credit markets in advance of a likely recession, but we think market fundamentals can withstand a mild slowdown.
- Another race to consider: the U.S. elections. Investors around the world are wondering how the results of the U.S. presidential and congressional elections might affect financial markets and portfolio construction. While we believe investment fundamentals matter more than politics, we anticipate that election season and potential policy shifts could have several effects:
- Market volatility will likely remain elevated (perhaps even after the elections). During this current election cycle, we expect volatility to be exacerbated by the growth of misinformation (accelerated by the AI boom), as well as multiple military conflicts around the world that could rattle financial markets. Even after the election, ongoing uncertainty could continue due to geopolitical conflicts, the potential for tax policy changes, debates over fiscal policy and the debt ceiling and other lingering issues.
- Tax shifts are almost certain, with general increases likely. The pending expiration of many provisions of the 2017 Tax Cuts and Jobs Act in 2025 means that tax policy will be a focus. With a wide range of possible outcomes, we expect most U.S. individuals will face a steeper tax burden in the years ahead, which speaks to the importance of planning now.
- Election cycles suggest moving out of cash. Over the past several quarters, we argued that investors holding onto high levels of cash investments amid heightened uncertainty should consider reallocating into fixed income and other areas. The election season presents a further argument for moving out of cash and into more risk-on market segments. During the past seven U.S. election cycles, cash (1–3 month Treasuries) significantly underperformed a variety of fixed income credit sectors as well as equities (Figure 1).
In focus: Municipal bonds remain compelling
There’s a lot to like about municipal bonds: They offer compelling income (especially for investors capitalizing on after-tax returns), feature solid credit fundamentals and enjoy a strong technical backdrop.
As the year progresses, we expect short-term rates to fall slightly and the municipal yield curve to steepen — this speaks to the benefit of adopting a longer duration for munis. And even without the prospect of a tailwind from a shifting rates environment, municipal bond yields are historically high, meaning current income should help generate attractive returns even without declining rates or spread compression.
We also believe that taxable municipals appear attractive for non-U.S. investors, institutions or others focused on this market segment. Spreads are attractive compared to other areas of the global fixed income market, and fundamentals remain very healthy.
Our highest-conviction views:
Infrastructure (+) offers the dual benefits of potentially holding up well amid prospects for slowing economic growth and weathering still-sticky inflation. Both public and private infrastructure look compelling, and we are especially fond of the public sphere.
Private credit (+) continues to look attractive, as investor demand is high and investment fundamentals look strong. We continue to prefer more defensive segments that are relatively well positioned to withstand economic downturns.
Municipals (+) continue to offer several benefits for U.S. individual investors seeking after-tax returns, as well as for crossover institutional and non-U.S. investors.
All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
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. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. 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. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
Nuveen, LLC provides investment solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.
