Risks To Our Outlook
Though recent Fed comments have seemingly settled investors’ nerves to a degree, investors remain wary about possible rate increases or asset purchase tapering. The central bank’s messaging will remain one of the most significant risks in the near-term.
We will continue to be mindful of “shocks” to global supply chains, as they could spark heightened (if short-term) inflation risks.
New Covid cases and varying vaccination rates across the globe could also create volatility for global equity markets. On a related note, incrementally better news out of the U.S., combined with incrementally worse news elsewhere, has led to a recent strengthening of the U.S. dollar. This is likely to create a headwind for emerging markets over the near term.
Best Ideas
At present, we have more conviction about our sector views than we do about geography or style. We are emphasizing near-term opportunities in financials and consumer areas, while also keeping an eye on industrials that could benefit from publicly funded infrastructure investments. We remain bullish on U.S. small caps, emerging markets and cyclicals for the longer term as the economy reopens, but think those areas could be subject to volatility over the coming months. We see tactical opportunities in some growth stocks that have experienced recent underperformance.
In Focus: A Bright Future For Semiconductors
A global shortage in semiconductors has caught global supply chains flat-footed. While headlines may create short-term inflation-based volatility, we see several factors that could provide a significant tailwind for semiconductor capital equipment and component manufacturers:
1. Supportive government policies aimed at strengthening supply chains.
2. A shift in supply models by consumers of semis, such as auto manufacturers who are likely to start stockpiling inventories in an attempt to avoid future disruptions;
3. A diversification in demand beyond smaller chips as industries such as hyperscale data centers (cloud-computing) are using larger chips.
4. The overall ubiquity of semiconductors as the global economy grows more dependent on technology.
The data support these trends: With rising demand, semiconductor manufacturers have nearly doubled their spending on equipment over the past four years ($36B in 2016 to nearly $70B in 2020). We estimate those levels could reach $100B by 2025.
In terms of inflation risks tied to the shortage in semis, price increases will likely be offset by a shift in consumer demand away from goods such as hand-held tech and autos, and toward depressed services such as dining and air travel. As a result, we expect any impact of semiconductor supply issues to have only a limited impact on inflation.
Saira Malik is the head of global equities at Nuveen.