Webinar Replay - Best Ideas: Rethinking Resiliency and Risk
PGIM gathered a panel of experts from its affiliates to explore the areas where they believe investors will find promising opportunities in 2024.
Long-Term Opportunities in a Period of Resiliency
Financial markets emerged from 2023 on a relatively strong footing, considering the fault lines that appeared to be emerging at the start of the year. Investors were girding for a tumultuous period as inflation held firm, recession signals grew louder, and regional banks came under stress. The banking system, financial markets, and the broader economy proved resilient, allaying fears that a downturn was around the corner.
With inflation subsiding and central banks opening the door to a policy shift, global markets entered 2024 on a more optimistic note but remain cautious about the challenges that may still arise. Higher interest rates, slower growth worldwide and geopolitical turmoil leave a cloud of uncertainty over the outlook. But investors who look beyond the current cycle will find attractive long-term opportunities across asset classes. To help investors navigate this environment, PGIM brings together the following perspectives from its affiliates.
We have experienced ferocious moves in rate and risk markets on the heels of moderating economic data and the Federal Reserve's pivot towards rate cuts. After market participants piled into the market as 2023 wound down—taking rates lower and spreads tighter—a pause is definitely in order before the rally resumes, albeit likely at a slower pace. True, credit spreads are tighter—much tighter on high yield bonds. But yields on investment grade indices are comparable to year-end 2022 levels, and central banks are, in all likelihood, done raising rates—signaling that we could still be at a strategic buy point for bonds. In the end, 2024 may be a lot like 2023: a bull market year that leads to solid returns. But last year was about so much more. Spreads, rates, and currencies all experienced wide swings, not only presenting risks, but also opportunities to add value through diligent active management. With uncertainty high and an increased likelihood of large and repeated market swings, the alpha opportunity set should be broad and deep. Therefore, we believe 2024 stands to be taxing, but ultimately rewarding, for investors.
While US equity prices relative to earnings rose in 2023, valuations are not seen as excessive. Among large caps, performance broadened in late 2023. If this trend continues, we could see the equally weighted S&P 500 Index fare better in 2024. The Bloomberg US Aggregate Bond Index has yet to fully erase its losses from 2022, setting it up for at least some potential gains in 2024. Rather than looking at bets among broad asset classes to add value, an alternative in 2024 will be to look within equities for niches where we see better opportunities. Regionally, Japan is attractive due to still-easy monetary policy, fiscal stimulus, and strong earnings growth expectations. Commodity returns are likely to be moderate but volatile in 2024. While higher rates have improved our long-term outlook for multi-asset portfolios from a return perspective, building a diversified portfolio has become more challenging with equity/bond correlations remaining significantly positive heading into 2024. However, stocks’ correlations with diversifiers such as commodities and safe havens (like gold) have turned negative, making them potentially attractive from a portfolio context next year.
Taken together, the last two plus years encompassed financial market distress driven by historic inflationary pressures and interest rate increases, followed by a rebound in asset prices to levels that, in some cases, reached near peaks. Valuation has played a significant role in both the decline and rebound of asset prices. This period has been challenging, but we note that many of our growth holdings have meaningfully participated in the recovery. These companies have navigated throughout the environment in strong financial and operational health. We also expect to see generative AI use cases and applications spread from technology providers and developers to a wide variety of industries and companies that use these tools to increase competitive positioning through improved time to market, streamlined customer service, and accelerated efforts to harness data in increasingly sophisticated ways.
A tougher financial backdrop highlights the increasing importance of fundamentals in driving value. In particular, the resiliency of occupier markets means the opportunities resulting from shortages of stock and debt capital are growing. But where and by how much? These will continue to vary significantly around the world. In the Americas, a slowing economy combined with elevated interest rates will cause property financing to remain scarce, extending the slide in property values and activity through 2024. The sharp repricing of European real estate assets continues as interest rates remain elevated and liquidity low. Overshooting is increasingly looking likely. There are positive trends supporting occupier markets, but downside risks dominate going into 2024. The Asia Pacific real estate market outlook is stabilizing, with the prospects of recovery starting in 2024. However, leasing fundamentals and capital market conditions will remain highly diverse across the region.
PGIM gathered a panel of experts from its affiliates to explore the areas where they believe investors will find promising opportunities in 2024.
PGIM’s 2024 Best Ideas shine a light on the areas where we believe investors will find promising opportunities, buoyed by PGIM’s distinct depth of expertise.
PGIM's President and CEO David Hunt talks about the big themes from CIOs globally and the implications for institutional investors.