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2024 EMEA Investor Forum
PGIM’s flagship institutional event for EMEA featured PGIM thought leaders, industry experts, and senior investors.
CIO VANTAGE POINT: PANEL DISCUSSION
PGIM CEO David Hunt introduces his three emerging themes for 2025 before inviting a distinguished panel of CIOs to discuss their insights on next year’s themes; how can the UK pension industry support the new government’s growth objectives and what are some of the opportunities and challenges for the broader industry.
Speakers:
- David Hunt, President and Chief Executive Officer, PGIM
- Wyn Francis, Chief Investment Officer, Brightwell
- Barry Kenneth, Chief Investment Officer, Pension Protection Fund
- Richard Tomlinson, Chief Investment Officer, Local Pensions Partnership Investments
THREADING THE NEEDLE: NAVIGATING TODAY’S MACROECONOMIC ENVIRONMENT
The past is no longer a reliable guide to the future. As the global economy transitions to an environment characterised by higher interest rates, elevated public debt and increased geopolitical risks, how can investors be calculated with their risk-taking? Will the outcome of the U.S. elections finally prompt European policymakers to enact sweeping changes to ensure the bloc is not caught in the crosscurrents of a widening trade conflict?
Speakers:
- Peter Hayes, Global Head of Investment Research, PGIM Real Estate
- Katharine Neiss, Deputy Head of Global Economics and Chief European Economist, PGIM Fixed Income
- Rod Turnbull, Regional Content Officer, Bloomberg Intelligence
THE RISE AND RISE OF PRIVATE MARKETS
The flow of institutional funds into private alternatives has been larger than at any previous time in history. We see this trend accelerating as investors value the income-generating properties and the diversification benefits of this asset class. A research study of 250 institutional investment decision-makers at institutions in Europe and the Middle East, found that more than 75% of the survey respondents anticipate taking on more risk over the next two years. The panel unpacks the drivers, opportunities and headwinds among various categories of private alternatives.
Speakers:
- Matthew Harvey, Executive Managing Director and Head of Direct Lending, PGIM Private Capital
- Andrew Radkiewicz, Global Head of Private Debt Strategy & Investor Solutions, PGIM Private Alternatives
- Stephan Wessel, Managing Partner, Montana Capital Partners
- Ibtissem Sfaxi (Moderator), Head of EMEA Business Development, PGIM Real Estate
Quick Take: 6 key insights from the 2024
At the 2024 EMEA Investment Forum in London, PGIM hosted an afternoon of discussion, debate, and peer-to-peer networking to help investors assess the market outlook, explore the geopolitical forces reshaping the economy, and identify emerging opportunities across public and private markets. Below are our six key insights from the day:
Top Themes for 2025 and Opportunities in the UK
“The last 18 months have seen the biggest rotation of capital I can remember.” David Hunt, President & CEO, PGIM
The top three themes for 2025 in CIOs’ minds are the great rotation of capital, political outcomes, and geopolitical risks.
Capital Shifts: CIOs remain overweight on the U.S. economy due to the resilience of the labour markets and robust corporate profitability. Japan has been the biggest beneficiary of heightened U.S.-China trade tensions and an improving economic outlook. Indonesia and Vietnam are seen as attractive capital destinations as investors reassess the outcome of realigning supply chains. However, the ease of accessing capital markets in developed economies compared to their emerging market counterparts remains crucial for investment allocations. On the other hand, there is little appetite for fresh investments in core Europe, with investors also staying away from China. However, stimulus packages might rekindle investor interest in the latter.
Political Changes: The great year for democracy has proved to be a rough one for incumbents. However, the biggest loser is the government's balance sheet. Fiscal responsibility has taken a backseat, with political parties in many countries preferring to stay silent on this important subject. For example, the UK's average issuance of government debt has jumped to around £260 billion annually, compared to £50 billion before 2008. While central banks can control short-term policy rates, investors are growing concerned about the longer end of the government bond markets due to the deluge of supply, leading to steeper yield curves.
Geopolitical Risks: Geopolitical risks are growing worldwide, and that is the No. 1 risk for investors. For example, the America first policy in the U.S. is changing the conventional world order and leading to a more unpredictable investing environment. CIOs are preoccupied with making portfolios resilient and diversifying investments in a world of increasing trade frictions. Investors are increasingly testing the impact of different scenarios on their portfolios to reduce the downside risks.
A changing investment paradigm for asset owners
“We need to think that the past is no longer a good guide to the future. Narratives and trends that were there for years have been stood on their head, and we need to look at things afresh.” Katharine Neiss, Deputy Head of Global Economics and Chief European Economist, PGIM Fixed Income
Until recently, the period since the global financial crisis was almost a false economy in which low interest rates drove asset values. That is changing. For example, the past two decades have been about sector bias in real estate. But it has now pivoted to geographies and the importance of different cities as economic drivers. As society ages, productivity matters more; therefore, capital allocations must be made accurately to boost productivity.
The conventional narrative for Europe is that the bloc is saddled with too much debt. But that is no longer the case. The debt-to-GDP ratio for the region’s peripheral economies—traditionally a concern for investors—is lower now than before the pandemic. Europe’s new challenge is the weakening growth outlook in the core economies such as Germany.
The broader concern for Europe to stimulate growth is not a lack of money as they have the fiscal means but the fiscal infrastructure and political choice to implement key facets of the Mario Draghi report. The region needs deeper capital markets and more private capital. That is only possible through deeper financial integration. The two main obstacles are concerns about more significant financial risks and loss of sovereignty. However, the rewards greatly outweigh the risks, as investors have always welcomed any pan-European integration news.
Shifting Dynamics in a Multipolar World
“For the EU, I like the sheet music, but the EU hasn’t formed the band, found the instruments, and is not playing in harmony yet.” Taggart Davis, Vice President, Government Affairs, EMEA
The global economy has moved into a multipolar environment, making it difficult for investors to assess geopolitical risks. In our 2024 risk report, about 56% of institutional investors, representing $9 trillion of assets under management, say the threat level from geopolitical risk is high over the next 24 months.
Europe is particularly exposed to these changing dynamics. The U.S. has become an unpredictable trading partner, and the risk of escalated U.S. and China tensions leaves Europe vulnerable. In response to a likely escalation in tariffs, Europe may adopt a more protectionist approach in its trade policy.
However, the underlying trend of geopolitical realignment doesn’t have to be harmful, and there could be potential winners and losers. Long-term investors shouldn’t be too obsessed with the impact of geopolitical risks in the short term, as the effect on asset prices tends to fade over long periods. However, investors should be wary of when a regional political event or conflict can spill globally into the broader financial markets.
Investors should strive to stay with resilient and diversified portfolios. While geopolitical risks cannot be easily hedged with financial instruments, asset owners could take a more strategic view of their portfolios and allocate suitably to defensive assets or companies with resilient supply chains.
How can ESG engagement make a difference?
“Less is often more. Don’t spread yourselves too thinly. But to achieve real results or expectations is to go narrow and deep.” Ian Burger, Head of Stewardship and Integration, Universities Superannuation Scheme.
Engagement is an important tool in investors’ toolboxes to drive shareholder value. However, there is growing pressure on investors to spend more time engaging with companies to address different issues. That has also resulted in some frustration because the pace of change arising from increased engagement has lagged expectations.
For engagement to be successful, it has to be a win-win situation for companies and investors. Stakeholders must be unified around the common goal of improving business decisions and investment performance. Engagement often breaks down when there is a misalignment between investor and corporate interests. For example, the engagement goal of the Paris Climate Accords alignment by 2050 may be too ambitious if targeted companies see certain engagement expectations as economically unviable in the context of current government policies.
Investors also need to understand issues that can be addressed at the corporate and broader systemic levels. They should recognize and be transparent about the limitations of engagement in the investment process.
Opportunities for investors as Private Markets take centre stage
“Anytime you have gone through such an increasing pace of asset adoption, the so-called golden age of credit, mistakes will be made..” Matthew Harvey, Executive Managing Director and Head of Direct Lending, PGIM Private Capital
The flow of institutional capital into private markets has grown exponentially in recent years. A research study of institutional investors in Europe and the Middle East representing assets of $10 trillion under management found that respondents have invested 25% of their portfolios in private alternatives.
In private equity investing, a broader trend towards mega funds will continue due to capital efficiency and lesser complexity in managing various relationships. Large asset allocators gravitate towards established brand names due to better processes and regulatory frameworks. Moreover, from a capital deployment perspective, larger firms have a global reach, helping them pivot across markets. However, bigger private equity firms face challenges due to higher borrowing costs and fewer exit options.
A higher for longer interest rate environment has resulted in increased returns for direct lending investors. However, it has also caught the industry off guard, with the rate-tightening cycle leading to higher interest costs for leveraged balance sheets, resulting in a significant drain on cash flows and weaker credit metrics. However, due to relatively tighter covenants, direct lending strategies are quicker to avert default. Manager skills are essential to driving recoveries, and larger asset managers have greater expertise.
In real estate, declining interest rates has resulted in a bottoming out of valuations. However, the recovery will be nuanced as investors focus on rental and income growth. Changes in lifestyle patterns, from students to families and older people, are key valuation drivers.
Uncovering opportunities in an uncertain fixed-income market landscape
“We are seeing a broadening of the investor base from insurance, pension and retail participants. Many investors weren’t too familiar with the asset class. There has been a resurgence as they seek to diversify away from corporate credit.” Gabe Rivera, Co-Head of Securitized Products, PGIM Fixed Income.
The global securitised market is worth around $5 trillion and touches the broader economy, ranging from consumer loans to residential real estate. This asset class comprises asset-backed securities, commercial mortgage-backed securities, CLOs, and residential mortgage-backed securities.
With corporate spreads near record levels, fixed-income investors are wary of owning duration in the current stage of the economic cycle. Securitised products offer investors the opportunity to own spreads at a higher level of the capital structure with attractive risk-adjusted return profiles.
At current spread levels, against the backdrop of rising geopolitical risks and uncertainty, securitized products offer a higher income with lesser spread durations. European “AA” CLOs offer value.
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2021 EMEA Investor Forum
The EMEA Investor Forum is an annual program that showcases PGIM thought leadership and capabilities across affiliates to prospects and clients.
