Inflation: How We Got Here And Where We’re Going
PGIM Quantitative Solutions discusses the historical background of past inflation episodes, why inflation is high now, and what the path forward could be.
The most attractive emerging markets growth opportunities we see today are in companies that benefit from long-duration, secular growth trends. Establishing exposure to these companies through index-like allocations can be futile, however, as many mainstream emerging markets benchmarks tend to hold old-economy companies.
The highest-growth emerging markets companies historically have been innovators and disruptors that re-imagined the way people communicate, work, shop, and play. They have also profited from long-term growth catalysts, such as the growing middle class. However, many of these companies are underrepresented in popular emerging markets benchmarks. In fact, many emerging markets companies are the growth leaders of yesteryear—from financials, energy, materials, industrials, telecom, and consumer cyclicals.
Even growth sectors traditionally considered innovative and cutting-edge, such as technology, do not guarantee exposure to high-growth opportunities. The MSCI EM Index has a significant weight in technology, and its top four holdings (Taiwan Semiconductor, Tencent, Alibaba, and Samsung) account for about 20% of the index’s market capitalization.1 These companies, however, have established businesses and are mostly incumbent technology leaders in Asia. They do not offer the long-duration, accelerating growth potential we see in other up-and-coming investment opportunities. About 6% of the index’s weight in technology is in hardware, where we see very little prospect for growth.1
To seek passive or even broad-based exposure to emerging markets equities is to actively underweight some of the most dynamic and fastest-growing companies in the region.
1 Source: Source: FactSet, MSCI, Jennison as of June 2021.
MSCI Emerging Markets Index is an equity index covering 23 countries representing 10% of world market capitalization. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 23 countries. Indices are unmanaged and are provided for informational purposes only. Investors cannot directly invest in an index.
Index sectors were grouped by Cyclical/Rate Sensitive, Defensive, and Secular Growth. Sectors with diverse holdings (consumer discretionary, communication services, and healthcare) were analyzed at the industry level, with each industry assigned to one of the three groups. Cyclical/Rate Sensitive includes financials, materials, communication services/diversified telecom services and wireless telecom services, energy, industrials, consumer discretionary (except internet and direct marketing), and textiles, apparel & luxury goods. Defensive includes real estate, consumer staples, health care/pharmaceuticals, and utilities. Secular Growth includes information technology, health care (except pharmaceuticals), communication services/entertainment, interactive media and services, media, consumer discretionary/internet, and direct marketing.
Information contained in this product or report is derived by Jennison in part from MSCI’s Index (the “Index Data”). However, MSCI has not reviewed this product or report, and MSCI does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. Neither MSCI nor any third party involved in or related to the computing or compiling of the Index Data makes any express or implied warranties, representations or guarantees concerning the Index Data or any information or data derived therefrom, and in no event shall MSCI or any third party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any use of this information. Any use of the Index Data requires a direct license from MSCI. None of the Index Data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
Risks— Investing involves risks. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Emerging markets are countries that are beginning to emerge with increased consumer potential driven by rapid industrial expansion and economic growth. Investing in emerging markets is very risky due to the additional political, economic, and currency risks associated with these underdeveloped geographic areas. Investments in securities of growth companies may be especially volatile. Due to the recent global economic crisis that caused financial difficulties for many European Union countries, eurozone investments may be subject to volatility and liquidity issues. Value investing involves the risk that undervalued securities may not appreciate as anticipated. It may take a substantial period of time to realize a gain on an investment in a small or midsized company, if any gain is realized at all. Diversification and asset allocation do not guarantee profit or protect against loss.
The views expressed herein are those of Jennison Associates at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice. PGIM Investments LLC is a registered investment advisor with the U.S. Securities and Exchange Commission.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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1050703-00001-00 Ed: 08/2021