Webinar Replay - Managing Disruption and Dislocation in the age of Geopolitical Shocks
PGIM brought together experts from its affiliates to discuss the impact of policy shifts on markets and the global economy.
Q4 2024 Outlooks
Implications of Rate Cuts, Geopolitics, and Economic Uncertainty
In delivering on expectations for a policy pivot as the summer came to a close, the Federal Reserve joined its global peers in kicking off a new rate-cut cycle at a time when global economies are experiencing uneven growth and an uncertain path ahead. Meanwhile, anxieties have seemingly intensified with US elections in the fall, war in the Middle East, and persistent tensions between global powers, all of which place geopolitics right in the middle of the investment outlook.
Economic and geopolitical questions will require long-term investors to remain agile and seek a diverse set of opportunities to build portfolios that can be resilient in uncertain times. PGIM brings together the following perspectives from its affiliates to help investors identify the opportunities and challenges emerging across asset classes.
Interest rates have passed their peaks, adding momentum to the existing bull market. Quarter-to-quarter fluctuations notwithstanding, odds favor stable to lower yields ahead—which bodes well for fixed income returns whether they come from carry or total return. The one constant in recent years—the high degree of uncertainty regarding the political, geopolitical, and economic environment—is intensifying before our eyes. While that uncertainty can be disorienting, it is also the foundation for opportunities to add value through active management. From secular stagnation to generational highs in inflation, paradigm shifts and market swings normally observed across an entire market cycle are playing out in a matter of quarters. Navigating an ever-changing market underscores the importance of agility and anticipation, particularly when signs of another paradigm shift emerge.
The third quarter saw a continuation of the risk-on theme evident in markets for much of this year, marked by a spike in volatility driven by US recession fears and the yen carry trade unwind. Still, as much as the first half of 2024 was marked by low volatility and strong gains in risk assets, the sudden flare-up in risk aversion in July and August set the stage for continued market volatility in the near term, until at least the US election is over. Historically, equity markets have turned in muted performance in the run-up to elections, followed by a post-election relief rally. With stocks already booking strong year-to-date gains, fundamentals might be a bigger market driver, together with election-related policy uncertainty. The stocks-bonds yield gap is well below its 30-year historical average of 2.6%, suggesting an unfavorable risk-return profile for stocks relative to bonds. Strong stock returns going forward depend on significant earnings growth improvement and valuation multiple expansion, which are less likely in the near term.
US equities remain underpinned by earnings growth, a resilient albeit slowing economy, historically low unemployment, and inflation trends falling back into pre-Covid patterns. Equity price appreciation has fared better than we initially expected through the first nine months of the year, and we have benefited from our focus on companies with above-average growth rates. We see this trend as likely to continue as the pace of economic activity moderates. The geopolitical uncertainties that existed at the outset of the year have only intensified. The US presidential election looks to be a close contest without clear policy implications. Furthermore, control of Congress looks equally difficult to call. This dampens advance market shifts, which are often the case when wider election result margins are perceived to exist. While we take note of heightened geopolitical uncertainty, we continue to focus on company fundamentals and idiosyncratic drivers of growth. It is where we derive conviction and find opportunity for businesses that are doing well and, in our view, will grow at above-average rates, now and in the future.
As real estate markets turn a corner this quarter, we continue to focus on the drivers of risks versus returns and, with that, determine which strategies are best to pursue despite still wider economic and financial uncertainty. Typically, the strategic decision is fairly straightforward—choosing the right balance between tactical short-term rental growth and the structural, more resilient, income plays. But this divide is becoming increasingly unhelpful. A third option is at hand—long-term resilient growth opportunities that reflect the ongoing structural shortfalls in development, capital spending and finance. We might call it a long-term recovery story, but this quarter it means we’re also focused on testing how resilient the demand-side of that long-term recovery really is.
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