Investors who are tempted to allocate more towards cash and wait for further clarity from central banks and economic data would be making a mistake, according to Nuveen’s global investment committee.
In the $1.2trn asset manager’s fourth quarter outlook, the committee urged investors to position their portfolios for late-cycle opportunities while they still exist.
“In investment portfolios, cash can play a useful role, but we don’t think it is the ideal ‘go-to’ asset class for achieving late-cycle outcomes,” said Saira Malik, chief investment officer at Nuveen.
“Today, many investors remain wary of inflation, monetary policy and a possible recession. But while these concerns continue, an important variable has changed: the economic cycle is further along, with the game clock running down,” she explained.
The market consensus is that the US Federal Reserve is gearing up for rate cuts to avoid an inevitable recession. However, Nuveen’s team believes inflation and interest rates will be higher for longer and that there will be no rate cut in early 2024.
“For now, these views remain aligned with the Fed’s actions and rhetoric, including the possibility of one more rate hike in 2023,” Malik said.
Get off the sidelines
Nuveen’s investment committee argue that the advantages of remaining fully invested in an uncertain environment outweigh the risks of staying on the sidelines.
“It may be tempting to allocate more to cash and wait for further clarity, but we think that would be a mistake,” they said.
“Many investors (including some of our clients) say they are intentionally sitting on large levels of cash, waiting for better opportunities.”
According to the asset manager, many institutional investors are also putting off asset allocation decisions or delaying policy rebalancing until more clarity emerges.
However, Nuveen’s investment committee pointed out that historically, investors have moved to cash at precisely the wrong times — when rising short-term interest rates were near their peak.
They warned that these investors have often missed out on opportunities to generate portfolio returns above the risk-free rate.
“We expect global economic growth to slow over the coming quarters, with inflation and rates moderating,” they said. “Cash yields would likely fall during this time as a result.”
When it comes to where to allocate to in this stage of the economic cycle, some of the firm’s highest conviction views are around private credit, infrastructure and municipals.
“Municipal bonds remain very healthy,” said Anders Persson, Nuveen’s chief investment officer of global fixed income. “Fundamentals and technical conditions are solid, and the longer-duration profile of municipal bonds should be a tailwind if rates are near their peak.”
“We are generally focused on longer duration across the municipal yield curve and see value in taking on credit risk thanks to the solid backdrop,” he added.
The firm was also positive on US large cap equities, “especially dividend-growers and high-quality growth companies within tech industries like software and semiconductors”, Malik said.
They were also positive emerging market equities, particularly Brazil and Mexico based on valuations and a better inflation outlook.
