Inflation May Be Peaking, What Are The Implications for Investors?InflationMayBePeaking,WhatAreTheImplicationsforInvestors?

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  >> David Hunt is with me. He is the CEO of PGIM, which is the P-G-I-M, Prudential's asset management arm. Good to have you, sir. Can you hear me, sir?

  >> Richard, it's a pleasure to be with you.

  >> Right. Excellent. Okay. First of all, do you believe inflation has peaked?

  >> You know, what's fascinating to me, Richard, is just how differently the different markets are answering that specific question. You know, when I spend time with our guys on the equities desks, it's amazing. They're looking at strong demand. They're looking at an employment picture which is very robust, and they're looking at corporate earnings which are actually very strong and expected to stay that way. Then I go down to the bond floor, and there I see a group of fairly dejected people. I mean, rates have risen. Spreads have gapped out. And it's quite clear that the expectation there is that the risks of a recession and the Fed tightening us into one has actually gone up quite a lot. And then I go up and I visit the real estate team. We have the third largest real estate firm in the world, and they of course have the top floor with a nice view. And they actually take very much of a through-cycle view of this. They would say actually we have been underbuilding in this country for a decade and prices are rising. And we expect that absolutely to continue, and, by the way, real estate is a good asset through an inflationary cycle. And so, they've seen robust transaction levels, prices rising, and very strong ability to raise money. So overall you're actually seeing the answer to your question of peak inflation being answered in very different ways in three different markets.

  >> A lot of the answers though -- and you alluded to it -- depends on the Fed's ability to affect the soft landing. And there's a view now that they won't be able to affect a soft landing, and some are already forecasting -- I agree, sir, it's a long way off the end of next year, but some are forecasting recessions mid to late '23.

  >> Yes, I think you're absolutely right. And, of course, this is the great debate between the heart and the mind. I mean, I think the market would like to believe, they would like to believe that the Fed can engineer this so that they raise rates just enough to dampen demand without fundamentally stalling the economy. But I would say that history is unfortunately not on that side. So, of all of the rate tightening cycles that we've had since 1945, three of them have resulted in a soft landing. But none of those have actually been during a time when inflation was rising as dramatically as this. So, history would say that those who say in two years we have a chance of a significant recession are probably backed up by some pretty good theory.

  >> If this is true, and let's take that as our model case, that there will be a slowdown which does tip the economy into -- the US economy into a shallow recession sometime in '23, what does that do for investments and equities, do you think?

  >> You know, I think that it has pretty wide-ranging implications for a whole set of asset classes. As we spend time with our clients now, there are really, I would say, three dominant themes on the institutional side. One of them is a real look at what the higher inflation rates are going to do across their entire risk assets and whether or not they should actually be moving into real assets or real estate in a more meaningful way. They've already been doing that a bit, but should they tilt it even further. I would say the second big theme has been with our emerging markets. I mean, do we really believe in the emerging markets index anymore after what's happened? I mean, these indices had in it China, South Korea, and Argentina all mixed together. And I think a lot of our clients are saying no more. These are very different countries, and we're going to begin to split those pieces absolutely up. And then to your question on equities, I would say most of them are holding the line. Their strategic asset allocation to equity is not at the moment any way changing, but of course, the recession will bring a good time and a good entry point for those that want to top up on that. And as final point I would say, Richard, that most defined benefit plans are actually seeing this as a time to derisk. And so, you know, most of them have a glide path. With rates rising, they are looking either for a pension risk transfer deal or they are looking to actually continue to do liability matching and get risk off their books.

  >> Now, this is interesting. You talk about the strategic possibility of a recession in that sense. And which, you know, you talked about institutions, but the individual investor has to decide firstly how to rebalance a pension fund. And I don't care whether it's a 401(k) or a TESSA or whatever it is in the UK, whatever country you're in, you have to decide if you're going to rebalance your pension fund and any individual portfolio you've got. What do you do?

  >> So, this is a real conundrum. And, of course, at the moment, these are times where we see rapid changes in expectations when retail investors react so differently from institutions. So, on the retail side, we have actually seen a lot of money moving out of bond funds. We've seen money move out of emerging markets funds, and we've seen money really move out of growth equity funds. On the institutional side, as I mentioned, we haven't seen that kind of movement. Most strategic asset allocation has remained pretty secure, with institutions looking for a way of getting in at a better price. And retail investors, unfortunately, tend to move at the wrong time, and so I really, really would encourage the careful movement around a diversified mix of assets at this time for retail investors.

  >> Oh, never a truer word said, David Hunt! Retail investors move at the wrong time. I count myself as one of those. I mean, if I'm going left, you should go right. Good to see you, David. Very kind [inaudible].

  >> Thank you so much, Richard.

  >> We'll talk again. Thank you, sir.