Nuveen’s Nick Says 2013 ‘Taper Tantrum’ Will Keep Fed Cautious
(Bloomberg) -- The Federal Reserve learned its lesson from the “taper tantrum” of 2013 and will be deliberate and slow in reducing asset purchases this time, according to Brian Nick, chief investment strategist at Nuveen.
Nick, who began his career at the New York Fed, joined the “What Goes Up” podcast to break down how the bond and stock markets are digesting the Fed’s plans to taper. He also shares what he thinks are some of the most interesting global investing opportunities at the moment, and gives his take on opportunities amid the turmoil in China.
Below is a lightly edited transcript of the interview highlights. Click here to listen to the full podcast, and subscribe on Apple Podcasts, Spotify or wherever you listen.
Q: You worked at the markets desk at the Fed itself -- talk to us about what you’re expecting for the tapering process. How aggressive will the Fed be? How soon are you expecting the normalization of interest rates to follow after tapering and how do you think the market is prepared for what’s coming?
A: From the Fed’s perspective, they have this institutional memory of the last crisis, when they did wait a very long time after the financial crisis -- three or four years -- before they were even talking about tapering their bond purchases. It took until 2013, 2014 for them to actually get busy with the task of rolling down those bond purchases. And in retrospect, they probably think they did that too quickly. Jay Powell himself has said the economy is actually in better shape today than it was in 2013 when they first announced that taper and the market had a big tantrum about it.
So the Fed is taking the lessons of the last recovery and their part in getting to the period of higher interest rates and fewer bond purchases. It probably thinks it went too quickly, tightened too much, tightened too quickly, even by what, at the time, seemed like very, very slow standards. And so this Fed has become much more dovish in its reaction function to hotter economic data, much more tolerant of inflation.
Q: What’s behind the sell-off we’ve seen in the bond market?
A: When you have interest rates rising and the yield-curve steepening, I think it’s a sign that the markets are optimistic about growth. I think you have to consider the context: Yes, the Fed was probably the approximate cause for the increase in rates, but we also have now a clear decline in U.S. and global Covid cases. So it seems like the delta variant is in decline in many more places than it’s on the rise at this point. And the economic data sneakily has gotten a little bit better, or at least it’s less prone to disappointment than it was over the summer.
The overall tone has become a bit more optimistic, maybe reversing some of the pessimism we saw in July and August, which is when rates were declining for reasons that, to us at the time, were pretty mysterious. So an overall more optimistic tone in the bond market that sees the Fed is pretty much getting things right. And not too many other things interfering with the general story, which is slower economic growth from a very, very high rate and peak in the second quarter and at least a number of quarters of above-trend growth ahead. So, I think still relatively smooth sailing for the U.S. economy.
Q: Nuveen has about $1.2 trillion in assets under management -- what is sticking out to you now as worth investing in?
A: We do have this late-market-cycle thesis, which means that a lot of things that would normally at this stage look inexpensive, look to us fully valued, or maybe even a bit expensive. The question is looking outside of those areas -- which I think make up the bread and butter of traditional diversified portfolios that people invest in -- that’s going to be the key. And, it’s really up to the individual. Are you diversifying fully into things like illiquid alternatives, private credit, farmland, timber? Those are all things that we’re keen on getting investors into if we can.
But even for investors who don’t have that illiquidity tolerance or that ability to allocate to alternatives, it’s things like emerging-market credit, which is an asset class that still looks early cycle compared to the U.S. markets. There’s aways a bit of a penalty just for being in emerging markets. But EM credit, one of the nice things about it is it’s a little bit less China exposure than if you go with EM equities. So less idiosyncratic, ad hoc China regulatory risk. And an environment that we know is going to be a reach for yield, increasing risk tolerance for fixed-income investors. As the global economy continues to do fine, people are going to be looking for areas where they can earn extra income and that’s going to be one of them. And then things like bank loans, so floating-rate loans.
Q: You sound China-averse. But it has to be tempting to go bargain hunting. What’s your thinking on China right now?
A: We’re not going to say that China’s uninvestable. An economy that big that’s growing that fast -- that has a lot of positive stories, whether it’s technology, whether it’s manufacturing. Just taking it off the table is very hard to do, even if you wanted to because it’s such a huge part of these benchmark indexes that any kind of China-specific risk is going to destroy your ability to add value elsewhere in the portfolio. You don’t want your entire performance to be hostage to what’s going on in China. So the idea is you want to be about market-weight China.
We’re not bottom fishing in areas that are at high risk for governmental capture, but we want to be much more selective. It really is trying to identify areas where the government may have an interest in becoming more active, a.k.a. reducing shareholder value, reducing profit margins because they’re serving some kind of larger economic or political purpose. And looking more to areas that China is probably going to allow a bit more of a laissez-faire attitude because they’re talking about companies that are trying to compete with the U.S. and other areas of the world on a global stage.
Click here to listen to the podcast in full.
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