View From the Top
Caption: Mid-Year Outlook with Brian Nick
Caption: Three investment themes for the second half and beyond
Caption: Mid-Year Outlook: The U.S. Economy vs. the World
Brian: Investors have been able to rely on one thing since the financial crisis. It's been that the US economy has been the best performer in most cases, the best run economy in the world.
Caption: U.S. Economy and Markets outperform
-More economic stimulus (Tax cuts and spending)
Brian: We've had sounder policymaking in most respects. We've had fewer crises than the rest of the world, and that's also helped the US economy of 2018 as we've had more stimulative economic policy. We have not had the types of crises that have popped up in emerging markets in the case of Turkey or Brazil where policymaking has been more shaky, that has enabled U.S. markets to perform better this year than the rest of the world and we think that may continue to be the case as we head into the second half of the year.
Caption: Strong U.S. Dollar
-Higher interest rates attracting capital
-Booming corporate profits
Brian: The US dollar looks strong compared to its historical average, but we think it can maintain that strength. Again, as higher interest rates entice more investment to come here to the United States and corporate profits are booming in the United States compared to the rest of the world. Thanks In part to the fact that we cut the corporate income tax rate at the end of 2017, enabling after tax profits to grow in 2018. The way the story is going to end is either of us is going to materially slow down or the rest of the world is going to speed up and catch up to the US economy.
Caption: Outlook for the second half of 2018
-U.S. market and economic leadership expected to continue
Brian: We think both of those things may happen in the next few years, but for the next six months, for the second half of 2018, we think the US led economic and market stories here to stay
Caption: Beyond 2018: How does the U.S. expansion end?
Brian: Anytime you have a group of people around the table, during what seemed to be relatively good, times the talk inevitably will turns to how is this all going to end? How are these good times going into turn bed? So, discussing how the next U.S. recession might pop up. Even though we don’t expect to see that for at least two or three more years, US investors have become very accustomed to seeing asset bubbles bursting and that being the proximate cause of recession.
Caption: Next recession not expected until 2020 or later
-Asset bubble bursting, deep recession
Brian: Think back to 2007, 2008. The housing market bubble crashing, the financial market collapsed. Think back to 2000 and 2001. The technology sector was a big bubble in the US stock market in the US economy. We don't see those same types of macro imbalances this time around what you may get it instead of an asset bubble bursting and starting the next recession is more of a classic definition of how our recession starts in a major economy.
Caption: Next recession not expected until 2020 or later
-Gradual slowdown due to rising interest rates
Brian: You end up with higher inflation, higher interest rates, thanks to the bond market and the Federal Reserve coming into Titan or slow down economic growth, economic activity when things run too hot and they tend to overdo things just a bit and you end up sliding into what we think this time around will be a relatively shallow recession, but that's not our outlook for the balance of 2018 or 2019. This is really a risk that we discussed in the context of 2020 and beyond.
Caption: Portfolio positioning: Lower expected returns, more defensive postures
Brian: Given the fact that we think financial markets are now probably more focused on the next recession than how far we are from the previous recession. It's probably time to take a look at portfolios and ask are, is there any area where we're taking excessive risk or any area where we are positioned in a way, in an asset that's done well over the last five or six years that may not do as well going forward, especially if the economy is slowing down.
Caption: What to look for in late-cycle
-Less risk in a downturn
-Low correlations with risky assets
Brian: So, the thing we're looking for across the various asset classes that we manage is quality. Is this an asset that is going to weather the next economic downturn, deliver reasonable rates of return in the meantime, but also a negative correlation to a lot of the other risky parts of the portfolio if and when that correlation comes in handy. So first and foremost, if you look at U.S. treasuries and other higher rated parts of the US bond markets, those have not looked attractive to include in the portfolio for several years now. But thanks to the rise in interest rates that we've seen risk-free or near risk-free assets look more attractive today than they have really at any point since the start of this economic expansion.
Caption: Bond portfolio positioning
-Take less risk in bond portfolios
-More emphasis on higher-rated government and near-government bonds
-Less emphasis on lower-rated corporate bonds
Brian: And that enables us to take a bit less risk in bond portfolios while not sacrificing return in the meantime. So, we're probably a little bit less heavily positioned in some of the lower rated corporate credit markets and a little bit more heavily positioned in some of the higher rated government or near government markets.
Caption: Commercial real estate positioning
-Expect somewhat lower returns in late-cycle
-Emphasize quality locations and types of real estate
Brian: We're also looking for quality and real estate markets and our holdings of commercial real estate where we expect returns will be somewhat lower as the cycle moves on and grinds to an eventual halt. We don't want to be caught in less desirable areas of the country or less desirable segments of the commercial real estate market. So, we're emphasizing quality there as well.
Caption: Stock positioning
-Less defensive than other parts of the overall portfolio
-Traditional defensive sectors appear less attractive (consumer staples, utilities)
-Avoid sacrificing potential stock returns
Brian: The area where it's a little bit less easy or less simple to do this is in the equity markets. The traditional defensive sectors in equity markets like consumer staples or utilities do not look as attractive to us at this point in the cycle as they would in a normal nine-year cycle when defensives would have tended to look a little bit less expensive than they do today. And therefore, we're not de-risking equity portfolios nearly as aggressively or looking for quality nearly as much as we do in other parts of the market. So, there's a little bit of an inconsistency there with respect to yes, we do want to be a bit more defensive, but we don't want to sacrifice potential return just in the name of becoming more defensive.
· U.S. economy and markets likely to outperform in second half
· Gradual slowdown likely to begin in 2019 – no recession until 2020 or later
· Investors should not be overly defensive at this point
· Emphasize higher quality and less risk in bond and real estate portfolios
· Maintain risk in well-diversified stock portfolios
RISKS AND OTHER IMPORTANT CONSIDERATIONS
The statements contained herein represent the views and opinions of Nuveen as of the date of production/writing and may change without notice at any time based on market and/or other conditions and may not come to pass.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her advisors.
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Past performance does not guarantee future results.
Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. 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. Non-investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets.
Video was filmed on June 25, 2018
Featured Speaker: Brian Nick, CAIA, Chief Investment Strategist
The investment advisory services, strategies and expertise of TIAA Investments, a division of Nuveen, are provided by Teachers Advisors, LLC and TIAA-CREF Investment Management, LLC.
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