On the Minds of Advisors: Advisors Fear Slow Growth, See Value in High-Quality Bonds
Aug 8, 2023
8 mins
With an economy already at risk from aggressive Federal Reserve interest rate hikes, the U.S. banking crisis added to financial advisors’ ongoing challenges in the first half of 2023. As we move further into the second half, PGIM Investments’ On the Minds of Advisors quarterly survey—conducted just before the banking turmoil in March and again in May—offers insights on advisors’ current investment concerns, where they see the most compelling fixed income opportunities, and changes they anticipate making to client portfolios.
Economic Slowdown Tops the Worry List
In the first quarter of 2023, advisors were most worried about inflation uncertainty when managing client portfolios:
- Inflation uncertainty (65%)
- Stock market volatility (52%)
- Interest rate uncertainty (43%)
Concerns shifted in the second quarter, with an economic slowdown topping the list:
- Economic slowdown (56%)
- Inflation uncertainty (53%)
- Stock market volatility (44%)
The anxiety meter changes when looking three years down the road, according to our survey. At that time, 59% of advisors expect geopolitical events will be their biggest concern when managing portfolios, followed by regulatory changes at 44% and then stock market volatility and low returns tied at 36%. Tax management is also on advisors’ future radar, with 32% anticipating it will be a top concern in three years compared to only 14% today.
Manager Perspective: Advisors’ concerns about inflation and a slowing economy likely have merit. In PGIM Fixed Income’s Q323 Quarterly Outlook, Chief Global Economist Daleep Singh notes that one of PFI’s economic scenarios calls for “weakflation” over the coming year—a combination of sluggish growth and declining inflation that hovers above the Fed’s target rate. Singh also highlights two risks for the U.S. economy—distress in the commercial real estate and the non-bank financial sectors along with the impact of three recent federal laws—the Inflation Reduction Act, the CHIPS Act, and the Infrastructure Investment and Jobs Act.
Advisors Favor Treasuries, Munis, and Corporate Bonds
With the U.S. yield curve remaining solidly inverted, financial advisors ranked U.S. Treasuries, municipal bonds, and investment-grade corporate bonds as the most attractive fixed income sectors in both the first and second quarters of 2023. Just a year earlier, advisors ranked U.S. Treasuries as one of their least-attractive sectors.
Two sectors gaining significant ground in the minds of advisors between the first two quarters this year were agency mortgage-backed securities and asset-backed securities. The attractiveness of the former rose from 24% in the first quarter to 34% in the second quarter, while the latter rose from 12% to 22% over that time.
Manager Perspective: Like financial advisors, PGIM Fixed Income remains optimistic about municipal bonds, noting that this sector could rise further as the negative effects from the debt ceiling debate, interest rate uncertainty, and the banking crisis dissipate. PGIM Fixed Income expects investment-grade corporate spreads to tighten slightly in the third quarter as continued investor inflows and a summer slowdown in bond issuance could support prices. Additionally, PFI notes that corporate fundamentals have softened but remain strong, and a severe recession is less likely.
Expecting a Fed Rate Hike Pause, About Half of Advisors Would Stay Put
Anticipating a pause in the Fed’s rate-hiking cycle, nearly half of advisors have no plans to change the equity and fixed income allocations in their clients’ portfolios, while just over half plan to stay the course with their clients’ alternative assets. While 42% indicated they would increase clients’ equity holdings, 38% would increase fixed income holdings, and 18% would raise alternative holdings if the Fed pauses, less that 15% said they would decrease allocations in any of those three categories.
About the Survey
These survey questions were part of Escalent’s Cogent Beat™ Advisor data collection. First-quarter 2023 data was collected between February 24 and March 7, 2023, and included responses from a representative sample of 476 financial advisors. Second-quarter 2023 data was collected between May 24 and June 7, 2023, from a representative sample of 379 financial advisors.
Investing involves risks. Some investments have more risk than others. The investment return and principal value will fluctuate and the investment, when sold, may be worth more or less than the original cost and it is possible to lose money. Past performance is not a guarantee of future results. Asset allocation and diversification do not assure a profit or protect against loss in declining markets.
Fixed income investments are subject to interest rate risk, where their value will decline as interest rates rise.
PGIM, Inc. (PGIM) is a registered investment advisor and a Prudential Financial company. PGIM Investments LLC is a registered Investment adviser. PGIM Fixed Income is a unit of PGIM. PGIM Investments and PGIM Fixed Income are affiliates.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
© 2024 Prudential Financial, Inc. and its related entities. PGIM Custom Harvest, Jennison Associates, Jennison, PGIM Real Estate, PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
For compliance use only 1072202-00001-00