Global Outlook Darkens With Recession Risks Abound
PGIM Quantitative Solutions’ 4Q 2022 Outlook discusses ways to withstand the slowdown with rising recession risks and elevated level of inflation.
Inflation has remained elevated and persistent in 2022 with consumer prices peaking at an annual growth rate of 9.0% in June, well above four-decade trends. Despite aggressive policy tightening and recent softening, these inflationary pressures may remain elevated over the next several quarters. While our baseline long-term inflation expectations assume a reversion to historical trends, the nearer-term inflation outlook remains highly uncertain.
It would be difficult for a traditionally balanced portfolio of stocks and bonds to generate positive real returns if inflation stays stubbornly high. The bright side is that there are public market investment options available to access exposure to real assets that materially outperform equities and nominal bonds in higher-inflation conditions, both on a historical and forward-looking basis. Although an all-in allocation might not be realistic for many asset owners, most investors should recognize the potential benefits in adjusting portfolio guidelines to accommodate greater allocations to real assets in search of improved outcomes in an elevated inflation regime.
Real assets with positive direct exposure to inflation are uniquely attractive amid high inflation due to their potential to help investors position for improved outcomes.
PGIM Quantitative Solutions
PGIM asset managers assess key trends shaping the investment landscape and where to find opportunities for different economic scenarios.
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. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic uncertainties. Investing in emerging markets is very risky due to the additional political, economic, and currency risks associated with these underdeveloped geographic areas. Investments in growth stocks may be especially volatile. 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. Real estate investment trusts (REITs) may not be suitable for all investors. There is no guarantee a REIT will pay distributions given the inherent risks associated with the market. A REIT may fail to qualify as a REIT as defined in the Tax Code, which could affect operations and negatively impact the ability to make distributions. There is no guarantee a REIT’s investment objectives will be achieved. Diversification and asset allocation do not guarantee profit or protect against loss. Investments in in Master Limited Partnerships (MLP) and MLP-related investments are subject to complicated and in some cases unsettled accounting, tax, and valuation issues, as well as risks related to limited control and limited rights to vote, potential conflicts of interest, cash flow, dilution, and limited liquidity and risks related to the general partner’s right to force sales at undesirable times or prices. MLPs are also subject to risks relating to their complex tax structure, including losing its tax status as a partnership, resulting in a reduction in the value of the MLP investment. Many MLP investments are in the energy sector and subject to a greater degree to risk of loss as a result of adverse economic, business, regulatory, environmental, or other developments affecting industries within that sector than investments more diversified across different industries. Diversification and asset allocation do not guarantee profit or protect against loss.
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