Markets Brace for Lower Returns and Higher Volatility
PGIM Quantitative Solutions explains why macro conditions continue to support risk assets despite expectations for moderating economic and earnings growth.
Secular Growth Reasserts Leadership as Economy Slows
Jennison Associates explains why they believe secular growth stocks will regain market leadership and tech-driven growth still has room to run.
Returning to a Low-growth World
An improving economy will no longer benefit the majority of investors in 2022, as we are likely past peak reopening phases and global growth for the current business cycle. Solid but slower GDP growth in 2022 is expected to moderate further in the years ahead.
While a strong economy, high inflation, and higher interest rates typically support the cyclical story, large cap growth stocks outpaced their value counterparts in 2021. With the Fed and other central banks accelerating tightening plans to curtail inflation, we don’t expect inflation to cloud the growth equity landscape for 2022 and beyond.
While some may worry about rising rates pressuring growth stocks, even if the Fed achieves its projected three rate hikes in 2022 and reaches its 2%+ terminal rate by 2024, that rate is still historically low and unlikely to adversely impact the stock market. In short, growth will become scarcer and in higher demand as we gradually make our way back to a low-GDP growth, low-rate world.
Source: Morningstar, FRED as of 12/31/2021. Past performance does not guarantee future results.
Room to Run for Tech-driven Growth
In a world of scarcer growth and rising competition, the future belongs to companies that understand the transformative power of technology and successfully integrate it into their core business models. Despite accelerated tech adoption and strong returns of tech-related stocks in 2020 and 2021, the tech-driven growth cycle is far from over, though it may evolve. We see a wide frontier ahead for new market leaders to emerge, in sharp contrast to the broader market and its historically low share of companies posting strong revenue growth. A little more than a decade ago, one out of two companies in the MSCI ACWI Index was growing sales at 15% or more annually. Today, it’s one in five. Given this dynamic, investors are willing to pay more for companies with consistently stronger earnings growth because these stocks outperform.
We are in a new world of rapid technology change and adoption that represents an extraordinary opportunity for investors to gain exposure to long-term growth and technology-driven trends.
We are in a new world of technology-driven change. Across industries, companies are evolving to asset-light balance sheets, leading to higher margins, sustainable profitability, higher return on assets, lower profit volatility, greater flexibility, and higher cost savings. For investors, we believe this process represents an extraordinary opportunity to gain exposure to long-term growth and technology-driven trends.
Attractive Areas to Find Future Leaders
Direct-to-Consumer models
DTC providers have significant growth potential with the digital explosion in retail, entertainment, electric vehicles and healthcare.
Software-as-a-Service
As cloud-based disruptors continue to accelerate the digital transformation of the enterprise, this trend is nascent but powerful.
Tech Enablers
Tech enablers providing payment processes and one-stop service platforms continue to benefit from soaring digital consumption trends.
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Volatile Markets Raise Tax Loss Harvesting Opportunities
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2022 Investment Themes: An Uncharted Path to Normal
PGIM asset managers assess the current investment landscape, key trends shaping 2022, and offer ideas for investors seeking to find alpha in moderating markets.
MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to provide a broad measure of equity-market performance throughout the world and is comprised of stocks from both developed and emerging markets. Russell 1000 Growth Index measures the performance of Russell 1000 companies (large-cap growth segment of the U.S. equity universe) with higher price-to-book ratios and higher forecasted growth values. S&P 500 Index is an unmanaged index of 500 common stocks of large U.S. companies, weighted by market capitalization. Indices are unmanaged and are provided for informational purposes only. Investors cannot directly invest in an index.
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. Diversification and asset allocation do not guarantee profit or protect against loss.
The views expressed herein are those of investment professionals at 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. PGIM Custom Harvest does not provide tax, legal, or accounting advice. This material is for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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