Global equities to be tested by continued market volatility
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
First quarter 2022 outlook
Global equities to be
tested by continued
market volatility
Saira Malik, CFA KEY TAKEAWAYS
Chief Investment Officer • We maintain a modestly bullish outlook for
global equities in this expansionary phase of the
economic cycle.
• The robust equity market gains realized since
Global equity markets were broadly 2020’s pandemic low will likely transition to still-
positive in the fourth quarter, implying positive but more muted returns.
confidence that the new Omicron • As macro conditions continue to normalize, stock
variant would not derail economic selectivity will become increasingly critical.
growth. Major U.S. indexes posted solid • We expect earnings growth to remain strong, but
gains in October and December, more fuller valuations may present a modest headwind.
than offsetting a modestly negative • In the U.S., we see opportunities in small caps
November. A hawkish policy pivot by and financials, as well as companies exhibiting
pricing power to overcome inflation and
the U.S. Federal Reserve in response to
defend or expand margins. Energy is our most
persistently high U.S. inflation provided favored sector.
greater clarity on the timetable and
• Outside the U.S., we prefer developed markets,
pace of tapering and rate hikes. Non- which offer greater sensitivity to the post-
U.S. equity markets also rose during pandemic recovery because their equity markets
are more cyclically oriented.
the period but lagged their U.S. peers.
Emerging markets recorded a loss, • Select companies in asset-heavy sectors such as
energy could see future growth rates improve
capping a disappointing year.
due to a focus on environmental, social and
governance (ESG) factors.
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUEGlobal equities to be tested by continued market volatility
ECONOMIC RESILIENCE IN A Fed Chair Jerome Powell and his colleagues took
TUMULTUOUS TIME a decidedly hawkish turn late in the quarter,
abandoning the “transitory” inflation language
The fourth quarter of 2021 was in many ways that had been in use as recently as the Federal
a microcosm of the full year, characterized by Reserve’s November meeting. After laying out its
dominant recurring themes including a global plan to begin tapering quantitative easing (QE)
resurgence of COVID-19 via a new variant; asset purchases in November, the Fed announced
persistently high inflation driven in large part by in December that it would double the pace of this
pandemic-driven supply chain disruptions in the tapering, from $15 billion/month to $30 billion/
face of massive pent-up “reopening” demand; and month, starting in January 2022. This faster pace
market fixation on the inevitable transition from means QE will end in March 2022. Additionally,
extraordinarily easy to increasingly more hawkish the closely watched dot plot showed that most Fed
monetary policy. members now foresee three rate hikes in 2022 – up
from less than one in their September projections.
Variants on a theme: Omicron
replaces Delta This abrupt shift seemed to signal awareness on
the part of the Fed that it had been behind the
Financial markets and pandemic-weary
curve on inflation. Earlier in December, the Bank of
populations that had grown accustomed to relaxed
England became the first G7 central bank to raise
restrictions and progress on the road back to
interest rates in this cycle. Smaller central banks,
“normalcy” following last summer’s Delta wave
like Norges Bank (Norway) and the Reserve Bank
were unnerved by the emergence and rapid spread
of New Zealand, also hiked in the fourth quarter.
of the new Omicron variant in late November.
Even the European Central Bank (ECB) – widely
Equity market volatility eased in December as
seen as the most dovish – announced it would end
Omicron, though highly transmissible, appeared to
its Pandemic Emergency Purchase Program (PEPP)
be a milder strain of the virus, helping to mitigate
in March 2022, matching the Fed’s timeline for
concerns about its impacts on public health, the
concluding QE.
economy and financial markets.
While Omicron’s less severe symptoms, lower Fiscal fizzle at year-end
hospitalization and morbidity rates, and shorter Proponents of U.S. fiscal stimulus welcomed
isolation periods for infected individuals were President Biden’s signing of a $1.2 trillion
encouraging, U.S. Covid case counts soared in bipartisan infrastructure bill in November. In mid-
late December, hitting their highest levels of the December, a breach of the federal debt ceiling was
pandemic by far. This surge exacerbated some averted as Congress enacted a measure to increase
existing supply chain issues and labor shortages, the government’s borrowing limit by $2.5 trillion,
and caused many companies to delay their allowing the U.S. to cover obligations into 2023.
return-to-office plans. But by year’s end it hadn’t But the year ended without the passage of the Biden
precipitated another round of broad economic administration’s $1.7 trillion Build Back Better
lockdowns like those seen in 2020. spending program, after protracted negotiations
failed to garner the support of Democratic
No longer “transitory,” inflation Senator Joe Manchin.
forces the Fed to play catch-up
U.S. inflation remained a headwind throughout Economic growth remains on track
the fourth quarter, with year-over-year increases Covid, inflation and policy uncertainty have
in the headline Consumer Price Index hitting 6.9% certainly been tenacious, but so too has the U.S.
in November and 7.1% in December — the highest economic recovery, a key support for equity
levels in nearly 40 years. markets. After expanding at a moderate annualized
pace of 2.3% in the third quarter of 2021, real GDP
picked up steam in the fourth quarter, bolstered by
2 OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.Global equities to be tested by continued market volatility
continued robust consumer spending, which hit a Figure 2: U.S. indexes: Bigger was better
seven-month peak in October. As of mid-January
Index return (%)
2022, the Atlanta Fed’s GDPNow tracker (not an
official forecast, but a running estimate based on 11.0
9.8
incoming data releases) indicated fourth-quarter 8.4 7.9
growth of 5%, while the consensus forecast on 6.4
Bloomberg was 6%.
2.1
S&P 500 Russell Nasdaq Dow Jones Russell Russell
Figure 1: Inflation remains high, but likely 1000 Industrial Midcap 2000
Average
settles lower
Data source: FactSet, 01 Oct 2021 to 31 Dec 2021. Past performance is no guarantee of future results.
Core PCE rate (% change)
Month over month (L) Year over year (R)
0.7 5.0
Growth beat value, but only among large caps
0.6 Total return (%)
4.0
0.5 Growth Value
0.4
3.0 11.6
0.3
0.2
2.0
8.5
0.1 7.8
0.0 1.0
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
'20 '20 '21 '21 '21 '21 '21 '21 '21 '21 '21 '21 '21
Data source: Bureau of Economic Analysis, Bloomberg, L.P. 4.4
2.8
FOURTH QUARTER MARKET 0.0
PERFORMANCE AND DRIVERS Large cap Mid cap Small cap
Data source: FactSet, 01 Oct 2021 to 31 Dec 2021. Past performance is no guarantee of future
U.S. equity markets bounce back results. Representative indexes: large cap: Russell 1000® Growth Index and Russell 1000® Value
Index; mid cap: Russell Midcap Growth Index and Russell Midcap Value Index; small cap: Russell
After its meager 0.6% rise in the third quarter, 2000® Growth Index and Russell 2000® Value Index.
the S&P 500 Index staged a powerful rally in the
fourth, hitting 16 new all-time highs en route to an Real estate edged technology as the top sector
11.0% return (+28.7% for the full year). The index
Sector return (%)
has now produced a double-digit gain in 8 of the
past 10 calendar years. 17.54 16.69
15.20
The resilient economy, together with continued
strong earnings growth – evidenced in third quarter
results reported in October and November – helped 7.97
equities power higher despite Omicron, inflation 4.57
and the Fed’s newly hawkish stance. Earnings per -0.01
share (EPS) for the S&P 500 were up more than Real estate Information Materials Energy Financials Communication
40% year-over-year, with revenues rising about technology services
17% for a third consecutive quarter. Overall, 80% Data source: FactSet, 01 Oct 2021 to 31 Dec 2021. Past performance is no guarantee of future
results. Data based on GICS® sectors from the S&P 500® Index. Chart shows the three top- and
of companies beat consensus estimates (well above bottom-performing sectors.
the historical average of 66%).
3 OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.Global equities to be tested by continued market volatility
Ten of 11 sectors in the S&P 500 posted gains U.K., France, Switzerland and Italy were among
during the quarter. Real estate (+17.5%) led the notable outperformers, while Japan (the
the way, as investors sought its relatively high prior quarter’s top-performing equity market)
dividend payouts and ability to provide protection slumped as regulatory risks made for a challenging
against elevated inflation. Information technology investment environment. Elsewhere in Asia, equity
(+16.7%) and materials (+15.2%) were the next- returns for China and smaller regional markets
best performers. Relative laggards included were generally negative, despite some encouraging
energy (+8.0%) and financials (+4.6%), with signs of economic reacceleration following a series
communication services the only sector to post a of recent Covid-related lockdowns.
negative return, albeit a tiny one (-0.01%).
Figure 3: The U.K. and eurozone led non-U.S.
Bond proxies, i.e., real estate investment trusts
equity markets
(REITs) and utilities, along with consumer
staples, were boosted by gains of about 10% Index return (%)
each in December. In contrast, the economically 11.0
sensitive energy, industrials and financials sectors
underperformed as the 10-year Treasury yield
tumbled more than 30 basis points in the week 5.2
4.4
following Thanksgiving, erasing all of its rise since 2.7
the beginning of the quarter. The 10-year yield
recovered in December to finish the period at the
same level it started. -1.3
Based on respective Russell indexes, large caps -5.2
-6.1
(+9.8%) bested both mid caps (+6.4%) and small
United United Eurozone Developed Emerging Japan China
caps (+2.1%). While growth (+10.9%) topped value States Kingdom non-U.S. markets
(+7.5%) for the third consecutive quarter, value
Data sources: FactSet, Morningstar, 01 Oct 2021 to 31 Dec 2021. Past performance is no guarantee
meaningfully outperformed in December amid the of future results. Representative indexes: China: MSCI China Index; developed non-U.S.: MSCI EAFE
month’s backup in Treasury yields. Additionally, Index; emerging markets: MSCI Emerging Markets Index; eurozone: Euro Stoxx 50 Index; Japan: Nikkei
225 Index; United Kingdom: FTSE 100 Index; United States: S&P 500 Index.
while growth dominated in the large cap space
for the quarter and full year, it trailed value
significantly among mid and small cap stocks for
OUTLOOK AND BEST INVESTMENT
both time periods.
IDEAS
Non-U.S. equities underperformed The new year has gotten off to a bit of a rocky
Overseas equity markets also rose during the start. Rising bond yields in January dragged on
quarter but lagged their U.S. peers, and results by U.S. equity performance, particularly given their
region were mixed. Based on MSCI indexes in local impact on growth and technology stocks, which
currency terms, non-U.S. developed market shares dominate the composition of broad U.S. market
advanced 3.9%, outperforming their emerging indexes. Accelerating economic momentum that
market (EM) counterparts, which suffered a was on display in the fourth quarter of 2021 may be
small decline (-0.9%). Because international challenged by Omicron in the first quarter of 2022.
currencies declined in value versus the U.S. dollar But we don’t expect the newest variant to result
in the fourth quarter, these returns were lower in an economic cycle-ending event, as each new
(+2.7% for developed and -1.3% for EM) when wave of the virus has had a diminishing impact on
translated into dollars. economic mobility. That’s not to say there won’t be
pockets of disruption resulting in risk-off trading,
On a regional basis, non-U.S. market returns but we think such instances could represent
were substantially higher in Europe than in Asia buying opportunities.
or Latin America. Among developed markets, the
4 OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.Global equities to be tested by continued market volatility
Figure 4: U.S. earnings growth is slowing but With U.S. inflation running at 7% year-over-year
remains above trend and labor supply still tight in the face of persistently
strong demand, there’s been some debate as to
S&P 500 Index
whether the Fed’s plan for three projected rate
Earnings per share (L) Price (R) hikes this year will be sufficient. The Fed continues
300 5,000 to walk a tightrope, but unlike in 2021, there is little
margin for policy error around rising wages and
250 4,000 interest rates.
200
3,000 While acknowledging the uncertainties that lie
150 ahead, on balance we maintain a modestly bullish
2,000 outlook for equities. We expect 2022 to bring
100
above-average economic growth, inflation that
1,000
50 should ease from 2021’s decades-high readings but
0 0
remain above pre-pandemic levels, more market
'11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 volatility and decent equity market gains. Earnings
Data source: FactSet, 31 May 2011– 31 Dec 2021. Past performance is no guarantee of future results. growth should remain healthy, but fuller valuations
may present a modest headwind.
Figure 5: Developed and EM earnings forecasts U.S. equities: broader market
continue to increase leadership
• We anticipate broader market leadership in 2022
MSCI EAFE
as economic growth normalizes, Covid impacts
Earnings per share (L) Price (R) lessen, inflation settles and initial rate hikes fail
200 2,500 to derail the economic cycle. These trends should
175 foster an environment in which investors can
2,000 choose from a wider range of companies and
150
125 industries – including (and perhaps especially)
1,500
those that may have lagged the mega-cap growth
100
1,000 names of 2021 but which now look poised to
75
benefit as the economy continues to expand,
50
500 albeit at a slightly slower pace.
25
0 0 • Importantly, broader market leadership does not
'11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 mean investors can simply dip their nets in the
water and scoop up easy gains. Why? Because the
MSCI Emerging Markets rising tide of unprecedented monetary support
Earnings per share (L) Price (R) implemented at the beginning of the pandemic
will begin to recede in 2022, no longer lifting
150 1,750
all boats. In our view, this creates a stock-
1,500
125 picker’s market in which fundamental research
100
1,250 and selectivity become increasingly critical to
1,000 investment outcomes.
75
750 • We see opportunities in small caps and financials,
50
500 as well as companies with pricing power to
25 250 overcome inflation and defend or expand
margins. Sectors that lack pricing power, such as
0 0
'11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 consumer staples, look less favorable. Stronger
Data source: FactSet, 31 May 2011 – 31 Dec 2021. Past performance is no guarantee of future results. relative earnings growth should also be a catalyst
5 OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.Global equities to be tested by continued market volatility
for outperformance by select stocks in cyclically throughout the second half of 2021, although
oriented sectors. Overall, we project S&P 500 EPS the dollar began to retrace a bit in December.
growth of 9% in 2022. In 2022, as the Fed begins to raise rates, the
greenback should continue to weaken, as it
• Our most favored sector heading into 2022
has tended to do after the first rate hike in past
is energy. Oil companies have been reluctant
tightening cycles (Figure 6), supporting the
to invest during the pandemic, and we expect
performance of non-U.S. equities.
higher prices to persist as rebounding demand
is met with hesitancy to increase supply. Despite • Non-U.S. developed market stocks remain
their growing importance, renewables are still attractive on a valuation basis and continue to
far from filling the demand gap, and this creates offer greater sensitivity to the post-pandemic
opportunities for growth in areas like exploration economic rebound — particularly in Europe,
and production. where cyclical sectors such as energy, financials,
industrials and materials account for a larger
• Also on our radar are dividend growers supported
percentage of equity markets compared to the
by healthy fundamentals, balance sheet strength,
U.S. (Figure 7). We favor select cyclically oriented
free cash flow and attractive relative valuations.
European companies whose prospects of stronger
Companies with these characteristics should
relative earnings growth could be a catalyst for
be well-positioned to benefit from continued
outperformance.
economic growth, bolstering their ability to return
capital to shareholders. • We are cautious on emerging markets. China’s
outlook looks cloudy, as the regulatory
• Because ESG factors remain a key focus for
environment and Evergrande saga continue to
investors, firms that prioritize ESG may have
weaken key data such as retail sales, industrial
an advantage. Select companies in asset-heavy
production and property sales. Together these
sectors such as energy could potentially see
challenges point to decelerating GDP growth, an
their future growth rates improve because of an
unfavorable backdrop for Chinese equities.
emphasis on ESG.
• Within the EM space, we are more focused on
Non-U.S. equities: developed markets opportunities in markets peripheral to China
have the edge (like Taiwan and Korea) or in Latin America
(such as Mexico).
• International stock market performance was
hampered by the U.S. dollar’s steady rise
Figure 6: U.S. dollar performance 6 months before and after first Fed tightening
101
100
99
98
97
96
6 months before first tightening 6 months after first tightening
95
Data source: Strategas Securities, LLC. Past performance is no guarantee of future results. Average of last eight cycles, indexed to 100.
6 OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.Global equities to be tested by continued market volatility
Figure 7: Non-U.S. indexes offer greater cyclical exposure
Index composition by type of sector (%)
MSCI Emerging Markets MSCI EAFE S&P 500
13%
22%
27% 29%
Cyclical
44% 44% 40% Sensitive
Defensive
34% 50%
Data source: FactSet, 31 Dec 2021. Past performance is no guarantee of future results.
RISKS TO OUTLOOK existing vaccines and booster shots against this
latest variant is still being evaluated. In the
• Inflation and its impact on central bank policy meantime, fear of renewed economic restrictions
will continue to exert outsized influence on will likely linger.
equity market volatility. The Fed’s more hawkish
tone has some investors worried that the timing • Fiscal uncertainty remains a risk. The Build Back
or magnitude of tightening measures may be Better package is in limbo as of this writing,
too aggressive, while others suspect they’re not but if a final version includes the proposed 15%
aggressive enough. minimum tax on large corporations and a 1%
tax on buybacks, it could reduce S&P 500 EPS
• An increase in inflation and nominal interest by roughly 3%.
rates to the point where real rates are no
longer negative would threaten the risk/reward • Geopolitical risks have expanded with the recent
advantage that equities currently enjoy. deterioration of diplomatic efforts between Russia
and NATO. Tensions between China and the U.S.
• Even as markets have seemingly concluded that remain just below a boil. Further sanctions on
Omicron does not pose a substantial threat, we Chinese tech firms will likely hamper emerging
still expect volatility to spike with each related markets, given China’s sizable weighting in
headline, especially since the effectiveness of broad-based EM equity indexes.
7 OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.The Nuveen Equities Investment Council (EIC) includes the firm’s senior equity portfolio managers,
with an average of three decades of investing experience. The EIC brings global expertise across
different equity styles and provides value-added insights to Nuveen’s investment process by refining and
delivering the firm’s collective equity market outlook to clients.
For more information, please visit us at nuveen.com.
Endnotes
Sources
Index Performance: FactSet; European Corporate Earnings: I/B/E/S; U.S. Corporate Earnings: Standard & Poor’s; Employment: RBC Global Asset Management; Russell Indexes:
FactSet, Russell Investments.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, 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.
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, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of
time. 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-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting
standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important
GCM-1995544PG-Q0122P 26440
to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
Nuveen provides investment advisory solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.You can also read
