Seek out growth
Disruptive companies that were challenging traditional industries before the crisis are well positioned to emerge as long-term growth leaders.
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.
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.
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.
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.
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.
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.
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.
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.
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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1046036-00001-00 Ed. 3/2021