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 has climbed out of a deep pandemic-induced recession and has been transitioning through the early phases of the economic cycle. The strong rebound drove interest rates and prices higher in the first half of the year. As the second half of the year kicks off, markets suggest curbed long-term growth and inflation expectations, signaling that we may be past peak growth, inflation, and interest rate levels. With massive liquidity in the system that shows little sign of abating, risk assets such as equities and credit continue to look attractive. But near-term risks—including rising COVID-19 cases, virus variants, political uncertainty, and “transitory” conditions lasting longer than anticipated—prevent investors from going “all in” on any particular investment style. Selectivity and diversification that prepares for different scenarios will be crucial—making active management particularly important for investor portfolios.
Bond spreads are likely to compress further in the second half of 2021 with expectations of more muted fixed income returns going forward. But bonds provide ballast as a downside hedge against equity market volatility and serve as a key source of income, so they remain important within a portfolio. Credit sectors may benefit from spread compression and help boost total return potential, but given idiosyncratic risks, will require rigorous risk analysis to ensure that investors aren’t overreaching.
Corporate profit growth was strong throughout the first half of 2021, with upward revisions pointing to a solid second half. Global equities rallied on the improving sentiment, with many indices closing out the first half at or near record highs. As markets move toward a post-pandemic normal, short-term narratives supporting cyclical/value stocks are dueling with long-term narratives favoring growth stocks. Investors may benefit from exposure to both styles.
Demand is building in some key areas as economies reopen. Occupier sentiment is expected to return quickly, which would support a rebound in demand for real estate space in the second half of the year. A range of cyclical opportunities are simultaneously in play, with some sectors and markets delivering strong growth and attracting capital, while others are facing severe occupier stress.
Our PGIM asset managers share key investment themes likely to drive markets in the back half of 2021, and strategies for investors seeking to capitalize on the opportunities ahead.
In many ways, the speed of the global economic recovery has been as breathtaking as the downturn. The pace has already led to an array of divergences. Perhaps most notably, the bond market recovery persists in the face of surging growth and inflation. After taking a beating in the first quarter, the bond market punched back and rebounded in the second quarter. Supportive credit trends and a search for yield look poised to fuel further credit sector outperformance, while volatility should present opportunities to add risk.
After the initial recovery spikes normalize and the effects of stimulus wane, the world is set to return to lower economic growth conditions. Meanwhile, tech spending, which has historically led economic recoveries, may have a more pronounced impact this time as companies across industries reimage their business models, supply chains, and digital infrastructures. With economies not expected to remain hot for much longer, and an innovation landscape that’s far from cold, conditions seem just right for secular growth stocks to drive us into the NEXT—or new exceptional technologies—economy. The goldilocks era of secular growth is upon us and we expect powerful secular trends to shape our digital future.
2021’s inflation surge has fueled intense debate. Central banks have taken the view that the current rise is benign and “transitory,” but markets have reacted nervously, reflecting concerns that we could be entering a new, more inflationary phase than the past decade. An inflation sea change could be underway and investors should be prepared for inflation to last longer than expected. Factors supporting this rotation—including unprecedented policy stimulus, booming economic and corporate profit growth, and rising inflation pressure—are compelling and likely to continue throughout 2021, and perhaps beyond. Against this backdrop, Value may have more room to run with last year’s losers shaping up to be this year’s big winners.
2021 is shaping up to be a significantly better year for the global economy and real estate markets. Financial and real estate investment markets have avoided distress, and firmer growth is expected in the second half of 2021 and beyond. Employment is expected to recover, and an ongoing low-supply environment supports occupancy and rents. Recovering occupier markets create the potential for revenue generation and value appreciation. Evidence from past cycles, and ongoing real estate demand, point to potential overshooting, which would provide growth opportunities in the short term. Today’s real estate investment opportunities span a wide range of categories.
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 and asset allocation do 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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1050619-00001-00 Ed. 7/2021