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2021 midyear outlook: Growth is peaking. What comes next?
Viewpoints from the Global Investment Committee
Our 2021 outlook released in December, “Dark Tunnel. Bright Light,” reflected the likelihood that the massive macro risks associated with the devastating coronavirus pandemic would dominate the first several months of the year. From an economic and markets perspective at least, the tunnel wound up being shorter than we expected. At this point, we think the world is at or approaching peak economic and earnings growth for the current cycle. That brings with it new concerns about inflation, rising rates and fuller valuations. Navigating these markets is likely to remain tricky, but the good news is that 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
- Growth is peaking. What comes next?
- Asset class outlooks
- Five portfolio construction views
Views from the TIAA General Account
Nick Liolis, TIAA General Account
Managing climate change risk as investment risk
How do you manage climate change risk embedded in a large institutional portfolio? The General Account (GA) investment committee has been thinking about this long before we committed, in May, to the GA becoming net zero carbon by 2050. With governments and regulators continuing to pursue their commitments to the Paris Agreement, we, as investors, need to stay ahead of the issue. It is part of our fiduciary duty, so the internal discussions were focused less on the why and more on the how.
Currently, climate change isn’t definitively priced in capital markets. We are dealing with a complex and relatively unknown set of risks without much historical precedent. Add to that the idea that managing for climate change is adding an additional constraint on the portfolio, and our task of sourcing the best risk-adjusted returns to meet our long-term investment objectives becomes even more demanding.
Our strategic, dynamic and tactical asset allocation process is built around allowing us to adapt and manage through different market environments over time. Setting a long-term carbon target, aligned with the current science and the global Paris Agreement, with flexible interim targets will allow us to do the same. As the world acts and reacts to climate change, we want to create resilient portfolios that deliver risk-adjusted returns over many different scenarios.
For the GA’s investment committee, this is a huge financial projections exercise. It requires an enormous amount of data, much of which isn’t comparable across asset classes or in some cases doesn’t yet exist. Take sovereign bonds as an example. There is no standardized way to measure the greenhouse gas emissions of a U.S. Treasury bond. Also, as governments and private entities transition away from carbon, the physical risks associated with climate change diminish. Ultimately a chief benefit of making a net zero carbon commitment is that it rallies the organization and directs resources to solving these problems. And as the quantity and quality of the data improve, markets can price climate risk more efficiently, allowing investors like us to make better-informed decisions.
We also realize that we can’t completely reduce all of our financed emissions to zero. So part of our task is to allocate capital to profitable enterprises that can provide negative emissions, such as carbon removal or sinks, to complement our main reduction efforts. This could involve strategies such as investing in agriculture, timber or bioenergy with carbon capture and storage technology. Additionally, we have to consider protecting against the physical effects of climate risk, especially if we consider the possibility of the world failing to meet the Paris Agreement. It’s an unfortunate but possible scenario, and one of the many that a resilient, long-term portfolio should be positioned for.
This is a challenge of known and unknown variables. For the GA, our solution is to try to stay ahead of the problem in order to properly meet our long-term investment goals in a rapidly changing environment.
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.