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2Q 2021 outlook: Welcome to the upside scenario
Viewpoints from the Global Investment Committee
Our initial 2021 outlook featured the theme “Dark tunnel. Bright light,” as a way to indicate that while we saw a strong possibility for economic and market upside, we also thought the path to get there would be difficult. And while the global pandemic remains a humanitarian crisis, that upside scenario is happening more quickly than we expected. That’s good news, in some ways, but also brings with it different risks and challenges. As we move closer to the end of the tunnel, Nuveen’s Global Investment Committee still sees opportunities across asset classes and remains committed to offering our clients ideas for how to navigate financial markets — for today and tomorrow.
More from the Global Investment Committee
- Views from the TIAA General Account
- Welcome to the upside scenario
- Five portfolio construction views
Views from the TIAA General Account
Nick Liolis, TIAA General Account
Rising rates, rising risks
This has been a challenging year for bond investors. The 10-year U.S. Treasury yield has almost doubled as inflation fears tick up on the back of a tumultuous 2020, when the U.S. Treasury and the Federal Reserve supported the economy and markets by buying bonds, injecting liquidity and keeping rates low. As inflation uncertainty increases and with it interest volatility and term premiums, will the Fed need to step in to align the markets with its forward guidance? How can the Fed anchor investor expectations? These questions are causing many investors (us included) to grapple with the uncertainty of future fixed income returns.
Even though we’ve arguably just been through one of the biggest economic shocks of our lifetimes, credit markets still seem to be enjoying the bull run that began way back in 2009. In usual cycles, most of the credit excesses are cleaned out in a recession. But that didn’t happen in 2020. The equity markets took a hit early in the year but quickly recovered, bolstered by the Fed’s and the Treasury’s actions. Corporate defaults did not reach the levels expected (and were primarily focused in hard-hit COVID-related sectors) and the bull market in credit effectively continued, while corporations and governments took advantage of the environment and issued record amounts of debt.
This raises several questions: How long will this last? What will happen when the cycle ends? And most importantly, how to manage for all of this? Our answer at TIAA’s General Account is broader and deeper diversification.
In our credit portfolios, we’re investing across a range of issuers, sectors and geographies across both public and private markets, relying on the in-depth research from the experienced teams at our investment managers. Real estate and other real assets also have a role as they can provide solid income generation, and in many cases inflation protection should inflation risks continue to increase.
The unanswered, and maybe unanswerable, questions about the bond market reinforce the need for resiliency in portfolios — and allowing for the flexibility to achieve your return objectives within your risk appetite. The GA’s resiliency is built through a flexible framework of multi-tiered asset allocation processes and plans that provide protection from the many known and unknown risks we face. We are in a unique position compared with many investors, as the GA has a very long investment horizon. Our approach is to employ a multi-decade strategic asset allocation plan, an annual dynamic plan and a near-term tactical plan simultaneously.
The GA’s strategic asset allocation provides guardrails designed to help us deliver on our core promises to our participants. Our annual dynamic asset allocation highlights investment areas of relative value and risks given the state of the markets. And our shorter-term tactical asset allocation allows us to respond to quickly shifting market conditions as we move up or down the risk spectrum, investing in assets that offer appropriate compensation for taking on that risk.
Asset allocation plans that allow investors to achieve return objectives through different market conditions help create resilient portfolios. The challenge is sticking to them when conditions are difficult. However, following these plans should improve the chances of long-term success.
As part of his participation in Nuveen’s Global Investment Committee, Nick Liolis offers his perspective as an institutional investor and asset allocator. Neither Nick nor any other member of the TIAA General Account team are involved in portfolio management decisions for any third-party Nuveen strategies.
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. Past performance is no guarantee of 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.
A word 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. 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. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. 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.
Nuveen provides investment advisory services through its investment specialists.