Seek out growth
Disruptive companies that were challenging traditional industries before the crisis are well positioned to emerge as long-term growth leaders.
Prepare For Extended Low Rates
Preparing for a slower and lower for longer world.
Capitalize on Emerging Markets Dynamism
Benefit from the evolving opportunity set by identifying strong growers early.
The global economy recovery is expected to continue to strengthen in 2021 as vaccines become more broadly available and normalcy returns to the world. The road won’t be easy or even as near-term risks such as rising COVID-19 cases, virus variants, and political uncertainty could impede the recovery. Strong fiscal/central bank responses in a moderately low economic growth backdrop should soften any harsh blows to the markets and increase the appetite for risk assets such as equities and credit. Diversification for different scenarios and selectivity will be crucial—making active management more imperative in investor portfolios.
MARKETS AT A GLANCE
The 2021 recovery will likely be uneven across countries, with stronger rebounds in countries and regions that have better controlled the virus and distributed the vaccine more quickly, enabling a faster relaxation of economic restrictions. China, in particular, started its recovery sooner and should see a strong expansion that will be a key driver of global growth for both emerging and developed economies in 2021.
Credit spreads are likely to compress further in 2021 with expectations of more muted fixed income returns going forward. But bonds are still necessary, as they offer a portfolio ballast that can hedge against downside equity volatility while serving as a source of income. Credit sectors—particularly higher-yielding sectors—may benefit from spread compression and help boost total return potential. However, given idiosyncratic risks, they will require rigorous risk analysis to ensure investors aren’t overreaching.
A strong earnings rebound is expected across most sectors in 2021, which is likely to support solid equity returns and help compress valuations. While the U.S. equity rally in 2020 was largely driven by “stay at home” stocks and secular growth/tech segments, stock market gains could broaden across segments and regions in 2021. That said, secular growth stocks driven by tech and innovation should continue to fare well, as they remain supported by accelerating digitalization trends.
While retail and office spaces remain challenged, demand is growing in some key areas. COVID vaccines should help release pent-up demand for some property types—such as hotels and gaming & leisure—which slumped during the pandemic but may recover robustly as vaccines become more broadly available.
The global economy is signaling a continued V-shaped recovery before moderating to lower trend levels. Vaccine distribution challenges may create short-term volatility that investors can turn into opportunities.
CURRENT INVESTMENT THEMES
Our PGIM asset managers share key investment themes likely to drive markets in 2021 and beyond, as well as strategies for ways investors can capitalize on the opportunities they may bring.
THE GOLDEN AGE OF CREDIT CONTINUES
2021 will bring its fair share of uncertainty, whether it be ongoing pandemic worries, geopolitics, or an economic backdrop that remains unpredictable. Those near-term concerns are likely to keep corporations conservative and focused on improving their balance sheets. Over the long term, the continued support of fiscal policy and central banks around the world, in a moderately low economic growth backdrop, tends to bode well for credit investors.
SECULAR GROWTH TRENDS ACCELERATE THE NEXT ECONOMY
The pandemic has accelerated the adoption of digital technologies by several years, and many of these changes will be permanent and drive growth in the NEXT—or new exceptional technologies—economy. Companies are understanding that to remain competitive they must value technology’s strategic importance as a critical component of business. Consumers have adapted even more rapidly, with consumption behaviors shifting dramatically over the past year toward digital. This mass adoption and new baseline will be the foundation for continued superior growth for the right companies.
2020 CYCLICAL LAGGARDS POISED TO BECOME 2021 LEADERS
Market performance started to broaden out in late 2020 from positive vaccine news, with a benign outcome in the U.S. presidential election amplifying that trend. 2021 is likely to be another strong year for equity markets with an earnings revival likely to be the key driver for equity market performance. Stock markets are likely to be supported by both structural and cyclical themes so the “reopening trade” (dominated by cyclicals and value stocks) should, at a minimum, vie with the “secular growth trade” for leadership as markets continue to broaden.
A GREAT REAL ESTATE REALIGNMENT UNDERWAY
The pandemic profoundly disrupted real estate markets, shuttering doors of retailers, offices, and hotels, and negatively impacting health care property types like senior housing as residents chose to defer occupancy. Increased digitalization trends are likely to remain headwinds to retail and office spaces, but serve as strong tailwinds for growth in areas like industrial properties, cell towers and data centers. Broad vaccine distribution combined with an accommodative political backdrop with supportive stimulus and spending should help the sector rebound, particularly in select property types where there is high pent-up demand.
QUARTERLY MARKET OUTLOOKS
PGIM Fixed Income 2Q 2021 Outlook: The Next Phase for the Bond Bull Market
In its 2Q 2021 outlook, PGIM Fixed Income shares their views on the current economic environment and outlook for fixed income markets.
Don’t Miss the Tsunami While Catching the Waves
Jennison Associates’ 1Q 2021 Outlook explains that while a broadening of the market will create near-term waves for 2020 laggards.
Light at the End of the COVID-19 Tunnel
QMA’s 2021 outlook explores the economic recovery and implications for markets.
PGIM Real Estate Fourth Quarter 2020 Market Review and Outlook
PGIM Real Estate shares its views on the current economic environment and outlook for global real estate securities.
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. 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 does not guarantee a profit or protect against loss.
The views expressed herein are those of investment professionals at PGIM Fixed Income, Jennison Associates LLC (“Jennison”), QMA, PGIM Real Estate, and PGIM Investments 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.
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1046036-00001-00 Ed. 3/2021