Almost everyone in markets was eager to see the end of the first half of 2022, which has been one of the worst six months for stocks in generations, a mess for bonds, and a nightmare for crypto and riskier assets.
But they also know there’s nothing magical about moving from the first half of the year to the second.
“Most of the first half’s significant headwinds are still in place: high levels of inflation, slowing growth, rising rates, Fed policy uncertainty and fallout from Russia’s war on Ukraine,” wrote Nuveen Investment Chief Saira Malik in a recent note.
But, Malik says, over the second half of the year inflation could slow down, US consumers could keep spending, and the Fed could complete its initial round of interest rate hikes and take a gentler approach to monetary policy. All of those factors would support the economy and markets.
With that in mind, Malik’s firm said that credit is a better pick than stocks over the next six months, arguing that even at cheaper valuations stock prices might not fully reflect the risk of cuts to earnings estimates.
“We prefer to access risk-on exposure through public fixed income credit sectors, which we think offer more compelling near-term return prospects per unit of potential downside risk,” she wrote.
Malik says Nuveen is especially bullish on high yield bonds, saying that at current levels of returns it’s a sensible investment even if a recession comes.
Members of the firm’s global investment committee think “corporate high yield looks particularly attractive, with nominal yields north of 7% even on BB rated bonds,” she wrote.
But their highest-conviction call is on municipal bonds, which Malik says are fundamentally strong and were oversold in the first half of the year.
“Tax revenues have continued to tick up and the ratio of rating upgrades to downgrades has increased,” she wrote. “The asset class has been unjustifiably punished this year by outflows, creating opportunities for long-term oriented, tax-exempt investors.”
How to play it: Investors can add portfolios of municipal bonds through exchange-trade funds like the iShares National Muni Bond ETF and JPMorgan Municipal Bond ETF.
Fighting inflationMalik added that US inflation probably won’t peak for a few more months, and it will stay high after that. She says real assets like farmland and commercial real estate are both good ways to hedge against inflation or profit from it, but the best way to play it right now is investing in infrastructure.
“It offers defensive equity properties that should benefit in a continued high- volatility environment,” she wrote. “In addition, it has historically proven resilient during inflationary periods given its cash flow-heavy, regulated nature.”
How to play it: Infrastructure has become an increasingly popular area for ETFs as well, with entrants including the AGFIQ Global Infrastructure ETF and ProShares DJ Brookfield Global Infrastructure ETF.
Malik also suggested adjusting to the sell-off by looking for bargains in “beaten-down public markets” and prioritizing them over private markets. She added that investors who shortened the duration in their portfolios should start returning to a more normal position.