At An Inflection Point – The Global Investment Landscape, Where to From Here?
David Hunt joins Conexus’ Fiduciary Investors Symposium for a discussion on the global investment landscape and what investors can expect in the months to come.
PGIM President and Chief Executive Officer, David Hunt, joined Bloomberg’s Caroline Hyde and Romaine Bostick during Milken Institute’s 2021 Global Conference in Los Angeles, CA. During the discussion, Hunt discussed inflation expectations in a post-pandemic world, implications of the Federal Reserve’s gradual tapering process, and the broader outlook for capital markets in the months to come.
>> I'm Caroline Hyde. This is Bloomberg Markets, the Close live from Milken Institute Global Conference. Joining me now, a key voice in the market. David Hunt, PGIM President and CEO, David has more than three decades of experience in asset management, a top 10 global asset manager, one and a half trillion in assets under management across public-private asset classes. David, it's wonderful to be here in the flesh in-person, [inaudible] across from you. And you must be hearing so many different takes right now from all the expertise that surrounds us here at the conference. What's the number one thing people are worried about?
>> [inaudible] it's really fascinating to be here and to have everybody back after several years of this conference being canceled. The first thing is giving a presentation with an entire roomful of people in a mass, gives new definition to taking a shower with a raincoat on, I assure you. I mean it's very difficult to still get the same energy that you do in the rooms. But that said, I would say the mood here at the conference is very optimistic. For the most part, you have kind of a split. There's the equity guys that think everything's wonderful, and [inaudible] guys that are convinced the world is going to end. And actually, I would hear generally people here believe that risk assets over the next 24 months and the economy is really going to do well.
>> It's interesting you talk about the optimism. One reason I would think they're optimistic is they did so well when times were bad, sort of when things were supposed to go wrong, for them, they went right. Is there any sense here that as we get to the other side of the pandemic and the economy maybe normalizes that that could actually work against them? Are you hearing anything like that?
>> Absolutely, there are some who would say that. And I thought one of the most fascinating things about the panel today was there was a total split between the audience who absolutely believed that inflation was not going to be transitory and the panel. Most of us think inflation absolutely will be transitory. And then we had a bit of a definitional argument over what transitory means. But in any event --
>> It's episodic now, David.
>> This is episodic. There's very clearly a group of people that think that things are going to get worse as the Fed begins to pull support back. But it's not the dominant view of professional investors here, I wouldn't say.
>> But, David, why do you think it's transitory? Why do you think the supply chain nightmares, the COVID plus, well, fiscal monetary policy stimulus is only going to boost inflation in the short term?
>> So I think that there's at least three different elements of the inflation story. One is a couple of things that are not going away anytime soon. And I would put in that housing, rent, and commodities, and those I think people believe are going to be with us at least for the next couple of years. We haven't built enough houses in this country for a decade. It's not going to be solved in two years. Then there's a whole set of things like the supply chain which I think most people believe will actually be solved in the next 24 months. Higher prices will bring in more demand and we will see those solved.
>> Twenty-four months? I mean that seems like a long time to me.
>> Is that episodic?
>> Well, and I wonder if the disruptions over a 24-month period plus however many months, what they got us to today, what type of economic drag does that have?
>> So this is why I think the 24 months is really interesting. So we haven't yet talked about the long-term trends that still are interacting as we go through this. So the primary drivers of disinflation over the last decade have been digital transformation and the demographics and the aging of the population, both of which have carried on actually even faster during this entire pandemic time. They will continue over the next couple of years. So our belief is that despite some of the first factors on inflation, those long-term factors over the 24-month period will ultimately begin to win. And so in 2024, we'll be back below 2%. That's our view.
>> And so what, therefore, of the reaction function from the monetary policy centers, what does that therefore mean in terms of interest rates, in terms of the yields that we've seen all over the place today, and your investment thesis?
>> So one of the fascinating things is what the Fed will do, and it's actually, I would say less driven by what's happening in the markets and more by the labor market. They are taking this dual mandate very seriously. They look at the labor market, and they say there are 5 million less people that work today than there were. They watched the participation rate really beginning to fall. And our view is that actually, they may make a policy mistake here by waiting too long, because we think the labor market has really changed. We actually think a lot of these jobs are not coming back, both because the workers aren't coming back and because they're going to be automated out of this. And so we think that the Fed needs to redefine what they think of as an acceptable employment level, or they're going to stay too loose too long.
>> It seems like they are at least of the mindset that we are close to that, at least close enough that they feel they could start pulling back --
>> At least on the tape.
>> At least on the tape. But it raises the question of once we get into the middle of next year and everyone wants to know when do you start to lift rates, is there a sense here that we'll be at a place with regards to the labor market and obviously with inflation that they'll feel comfortable moving rates higher?
>> You see, that's what I think the pressure point is on them. From a market point of view, I think we would say the time is now. You know, we've had -- emergency measures are in place. We are not in an emergency situation anymore. We should start tapering. You know, at some point next year's rates should go up if we just look at the economic side of things. It's the labor market that I think could cause them to be more cautious on that. And that's where I think they may make their policy mistake. But that is the dilemma that Chairman Powell finds himself in.
>> If they made that policy mistake, go too slow, you keep rates lower for longer. What does that mean in terms of your asset prices? What does that mean? Do we just keep seeing the S&P 500 continuing on higher? Do we see more volatility in the market or not?
>> So without a doubt, the dominant theme of the last two years has been negative real rates. I mean, it has never been more punitive to hold cash. And what that has done is it has certainly supported the equity market valuations we see. But it's also supported this hunt for yield for, you know, high yield, for bank loans, for emerging market debt, for structure products. And we will see that continue so long as the Fed doesn't move.
>> Well, let's talk about that, and particularly alternative assets which have sort of become mainstream assets now. I mean everyone I've talked to here has basically moved into that realm if they weren't already there. And that seems to be what clients want right now. That seems to be where they think that's the only place they can really make a good percent return.
>> No, you're absolutely right. I mean we're one of the largest alternative managers in the world. And we do believe we're very bullish on many parts of core real estate at the moment, in particular multifamily housing. I mentioned how far behind we are in that. I would also say industrial as a big piece of that. So those are some of our highest consensus calls. And I think you're hearing that here at the conference. You know, private credit has been another big part of this. I mean the banks have literally not kept up with their lending and the private credit market has had to step into that. Isn't that amazing?
>> But is that because they can't get what they want out of the banks with regards to the flexibility and the way that this credit is structured? Is that it? Or is it just availability overall?
>> No, it really has to do with the whole way in which regulations following the GFC were put in place to make the bank safer. And the good news is I think that really worked. So the banks are safer, but it means they also have much higher capital charges against many kinds of loans. So despite the remarkable earnings you saw coming out of the banks this week and last week, you actually didn't see lending growth grow that much. And yet, the economy is expanding greatly. Where's that growth coming from? Private credit. And that's why you're seeing so much interest.
>> OK. So much interest, too much interest. At what point do you start to see bubbles? Are we back to an era where we're worried about bubbles in the market?
>> So I have been and do remain somewhat worried about areas within private credit for sure. We've been doing it for a very long time. We source our loans through direct relationships with management teams. Many of the newer players are coming in and they're doing this on a purely [inaudible] basis. They actually have never met the management team of one of the loans that they're doing. That is dangerous. And I think there is a group of newer players that have come into private credit who will get hurt in the next downturn for sure.
>> The way that things are getting pitched right now, are they pitching fundamentals or they're just pitching concepts? So, I mean what are they doing?
>> For the most part, they're pitching the fundamentals of middle-market companies, because I think that is what makes this special, because you do have an ability to structure the deal to meet the needs of that client, but also to protect you as an investor that you don't get with a bank loan and you don't get certainly in the public markets. So unless you believe in that, you're really losing out by taking advantage of the private credit market.
>> David, I hate to end on a down note, but you just said about --
>> Here we go.
>> I know, Debbie Downer. But you were saying about the next downturn. When is the next downturn? If you see a policy mistake and the Fed continue with rates for longer?
>> Well, history would say that the Fed ends almost any of these with a policy mistake. Right? And maybe that's almost tautological. But certainly, I think that at some point, we will see rates begin to move up and they will decide. And at that point, we'll see a lot of risk assets re-rated. But I don't see that happening in the next 24 months.
>> David, great to have you. Great to see you in-person.
>> Great to see both of you.
>> Absolutely. David Hunt, PGIM President and CEO right here at the Milken Global Conference.