As the environment changes rapidly, investors are facing a world that looks far different than it did during the bygone era of low rates and low inflation. Economic uncertainty, stubborn inflation, military conflicts, and key elections create a murky backdrop for financial markets, while the ultimate trajectory of interest rates will have broad implications. In uncertain times, investors seeking to find both opportunities and mitigate downside risks can turn to a diverse mix of public and private assets—underscoring the role that alternatives could play in the portfolio.

As the amount of capital being invested in alternatives increases, global investors could not only take advantage of the differentiating power of alternatives, but also identify the opportunities across alts that are yet to be uncovered. PGIM brought together experts from its affiliates for an in-depth discussion about current market conditions, the evolving outlook across asset classes, and the opportunities emerging in the alts universe in 2024 and beyond. The following is a summary of the discussion.

• Structural strength in real estate: The repricing of properties in residential and commercial real estate appears to be nearing an end for most sectors, and structural tailwinds could give rise to new opportunities for investors. In commercial real estate, three main strengths are emerging: fundamentals are robust on the demand side, limited supply has come into the market in the last 1-2 years, and there is a meaningful amount of investable capital waiting for the right moment to re-enter the real estate market. Supply-demand imbalances could create pricing power for landlords in the mid-term. Fundamentals remain strong on the housing side. Demand for rental housing has outstripped supply for the last 15 years in the US, and shortages are particularly evident on the lower end of the affordability range. Homeownership remains out of reach for many people, especially given the increase in mortgage rates. We believe that the creation of affordable housing presents an attractive place to invest.
• Credit opportunities: Companies are increasingly going outside traditional channels to meet their capital needs, creating demand for flexible solutions that can address complexities in capital structures. There are four main drivers of this trend: 1) Inflexible pools of capital have grown significantly across credit markets, which is reducing the ability of capital to adjust to changing conditions and flow to where it is needed; 2) Funding markets are shrinking, which is tied to central banks shrinking their own balance sheets; 3) Quality biases in credit markets have tightened financial conditions further down in quality; 4) Non-traditional channels tend to reduce execution risk. To take advantage of this environment, there are three broad areas of investment opportunity in the world of special situations: liability management, mezzanine strategies in public fixed income, and classic-style distress debt and associated restructurings.
• Diversification through liquid alts: The success of the endowment model has drawn more institutional investors into alternatives. As a result of this growth in illiquid markets, investors will need to navigate potential liquidity risks in their portfolios, calling for a broader approach to diversification. Liquid alts could help investors construct a portfolio that is diversified in its asset classes, strategies, and liquidity profile. Agile managers such as systematic macro strategies and managed futures could capture substantial returns when traditional asset classes come under stress given their ability to be directionally short. During rosier times, macro strategies can still generate positive returns by pivoting to long positions. Sticky inflation, contrasting economic outlooks globally, and the risks associated with geopolitical conflict and fiscal stress have created a murky outlook. When times are uncertain, investors' portfolios could benefit from agile strategies that can deliver returns and cushion the blow as various scenarios materialize.
• Evolution of direct lending: Central bank policy has supported higher yields, and investor interest in direct lending continues to grow, leading to a wider pool of available capital. However, supply remains low. To find opportunities, investors can look toward the middle market. Banks have stepped back from financing middle-market companies, creating opportunities for direct lenders to fill the void. By sourcing deals in the middle market, direct lenders could generate differentiated deal flow and be more selective overall in the deals they pursue.

The investments and returns discussed within do not represent any PGIM product. This material makes no implied or express recommendations concerning how a client's account should be managed. This material is not intended to be used as a general guide to investing or as a source of any specific investment recommendations.