Cryptocurrency May Not Be the Asset Class for Institutional InvestorsCryptocurrencyMayNotBetheAssetClassforInstitutionalInvestors

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  >> Taimur Hyat, the COO, sees little real-world evidence that cryptocurrencies deliver diversification and that they're effective inflation hedges or even possess the characteristics of a safe-haven asset. Well, PGIM COO Taimur Hyat joins us now. Taimur, as always, thanks so much for joining us. I can't believe I'm in New York when you're in London, but that's another matter. Talk to me about cryptocurrencies, and what kind of role are they playing in these crazy markets where we're seeing a massive sell-off and so much volatility.

  >> Well, I think they've actually confirmed lots of the things we've said about cryptocurrencies. You know, Bitcoin is a teenager this year -- first trade happened in 2009. And they've proven that many of the things that we thought cryptocurrencies might do for us actually still don't play out. Do they work as sort of digital gold? They haven't been a safe-haven asset. Do they work to protect us against inflation, Francine? Well, inflation has gone to 9% in the UK, where I am today, and, you know, Bitcoin and the other cryptocurrencies are heading in the other direction. Do they have any stable correlations to act as a diversifier versus other asset classes that investors are in? There's absolutely a lack of stability, and I think that's proven even more so now where they're basically acting as a sort of levered risk on trade, rather than a true diversifier of the portfolio. So I think that's just the beginning of the trouble for cryptocurrencies, because we still have the headwinds of regulation and central bank digital currencies, which should be quite negative for currencies in the future as well.

  >> Taimur, I love your straight talking. Tell me what you really feel on cryptocurrencies. But do they serve any purpose? Like, the markets are falling out of bed. And, you know, that compared to some of the other parts of the markets, is there an argument that says cryptocurrencies in the future will morph into something that could be used as a broader asset class?

  >> Well, we never say never at PGIM. We look at what the data says. We've tried to torture the last 12 years of data on Bitcoin. And, at the moment, there's no evidence of stable correlations, diversification, a real risk-return benefit that outweighs the drawdowns. But there are real opportunities, Francine, in the broader ecosystem -- the sort of accidental innovation that happened in the creation of cryptocurrencies, blockchains, distributed ledgers. We actually see four or five pretty important investment opportunities that we do think long-term investors should focus on.

  >> So, Taimur, where do you see actually the value longer term for some of these things? I guess the -- you know, some of the non-crypto believers say the concern is that it's getting such sway in retail parts of the markets that it's just impossible to ignore because a lot of clients want to know how they can get, you know, in on the action.

  >> I think, on the cryptocurrency side, it's important for institutional investors, long-term investors, to avoid the FOMO, to avoid the momentum trade. It's fine, as a retail investor, if you want to speculate in this for a small piece of your assets, just like you might gamble on other things. But for long-term institutional investors, Francine, the real opportunities are in the broader blockchain universe, not in the gold, but in the sort of shovels and picks. And that's in smart contracts. It's in private permissioned blockchains used by financial services company. It's in tokenization. It's in the infrastructure that central bank digital currencies will need to use that sort of underpins cryptocurrencies. And I think it's maybe just watching the metaverse space where there's a lot of losers, but maybe a couple of winners in the future, too.

  >> Taimur, I love that. Avoid the FOMO could actually apply. Wise, wise words could apply to so many things in life. Taimur, give me a sense of actually where you see this market volatility and the market sell-off, selling the broader markets? Like, where do we find the floor on the S&P 500?

  >> Yeah. I think, and we firmly believe, Francine, that we haven't seen the bottom of the dip yet, that there is -- this is just the beginning of a rollercoaster ride. Everything is now driven by inflation. Central banks want to retain their credibility on inflation. And I think as that inflation journey spills over into monetary policy, fiscal policy, markets, there's room to go. And our fear is absolutely inflation is quite structural and embedded now. It's in housing. It's in other things. It takes a long while to play out. But we also worry about, and I would think investors should be thinking about, recession risk. If central banks want to retain their credibility, they may go too far, too fast. And we may be in a recession already exacerbated by the war in Ukraine and other factors. So recession risk weighs on us quite a lot.

  >> But Taimur, is a recession now unavoidable? So we're seeing -- I have, you know, James from the News Desk just sent me a story about chicken wings in the US. Pre-COVID, they used to go for $19. Now they're going for $34. Is this symptomatic of inflation that's out of control that leads to stagflation, with monetary policy not being to avoid a recession?

  >> I think we'll all still hope, Francine, that somehow the central banks can engineer a soft landing and just kind of, you know, create the Goldilocks level of rate rises to protect inflation, but not send the economy into a deeper spiral downwards. And let's remember the US is in a much stronger place in terms of unemployment and growth than Europe or other Asian and emerging-market economies. But I do think our base case is that, given how late central banks have acted on inflation, how embedded expectations might become, that a recession is quite likely in the next 24 to 36 months.

  >> So what's your haven par excellence? If there is one, it's unclear exactly what form that takes.

  >> A safe haven right now?

  >> Yeah.

  >> We see a lot of our clients, certainly across PGIM, across our $1.5 trillion in assets, sitting in cash. I think the best strategy right now is to be fairly risk-off, be in the more conservative part of our various asset classes and wait to see a very volatile journey play out.

  >> And Taimur, if there's so much inflation, so much margin pressures in the US, how much worse is it going to get for the rest of the world?

  >> I think Europe has the added pressure of the Ukraine war and energy prices and commodity prices that perhaps the US is a little more immune to on the energy side. So I think there's going to be a fair amount of embedded inflation in many countries, and you're already seeing waves of this hit emerging markets. You know, the global economy, despite all the talk of delinking, is still very interconnected. And we are seeing these inflation waves spiral into emerging markets as well. So I think this rollercoaster ride has some space still to run. And I do think that we will have inflation as the central tenant of our markets move around the world for the rest of this year and much of next.

  >> Taimur, thank you so much for a great conversation. I mean, I know we plan most of our shows, but it's so good. We got lucky with you today coming on TV to talk about this market sell-off. Taimur Hyat there, COO at PGIM.