Jennison Associates 4Q 2019 Outlook

Healthy U.S. consumer continues to offset headwinds from trade tensions and political uncertainty.

October 14, 2019

U.S. equities markets remained volatile in the third quarter, unsettled again by trade discord. At the end of June, investors appeared relieved that no additional tariff increases had been announced or implemented. The respite was short-lived, however, as the lack of tangible progress in U.S.-China negotiations, followed by new threats and escalating rhetoric, rekindled worries. Despite the trade tension and uncertainty, U.S. markets managed modest gains in the quarter and advances through 2019’s first nine months were in the double digits. Developed Europe & Middle East lost around 2% in aggregate, while emerging markets declined around 4.3% in the third quarter.

Jennison Associates’ Growth team does not forecast a U.S. recession. However, the trade war has already claimed casualties in industries most directly exposed to existing tariffs. Without clarity or a new agreement with China, the fallout from trade restraints already implemented will increasingly weigh on business confidence and consumer spending, as moves are taken to mitigate and pass on the increased costs of doing business. With this uncertainty, business planning and investing are likely to be hampered, with delays and hesitancy in spending probable. The U.S. political landscape is likewise unsettled and apt to weigh on confidence and activity, as impeachment proceedings against President Trump begin and the 2020 election cycle ramps up. The most powerful offset to these headwinds is the health of the U.S. consumer. Employment remains strong, and incremental wage gains continue. Consensus projections of U.S. GDP growth—1.5%-2.0% for the year—were essentially unchanged.
 

At a glance – Jennison Associates’ equity sector views as of September 2019

In the quarter and for the trailing one year, defensive sectors such as utilities, real estate, and consumer staples led. Along with information technology, these are also the best-performing sectors year to date. Longer term, growth sectors such as information technology and consumer discretionary are the best performing. Energy is the weakest sector for all time periods.

Jennison Associates 4Q 2019 Outlook

Sector

Outlook

Information Technology

Information technology was the best-performing sector in the S&P 500 Index in the first three quarters of 2019, advancing more than 31%. The market continues to favor companies with faster organic growth in this low real GDP-low rate/inflation environment. Tech stocks remain reasonably valued. As of September 30, 2019, the S&P 500 Index’s information technology sector’s next-12-month P/E of 19 was modestly above the 17 for the S&P 500 Index. Reasonable relative valuations continue to be driven by the sector’s overall stronger ROEs and free cash flow generation, often as a result of innovative and disruptive product offerings.

Spotlight

We are assessing companies that we believe can continue to grow in a slowing global growth environment. This includes U.S. wireless tower companies who stand to benefit as carriers spend to meet the burgeoning growth in mobile traffic and the implementation of 5G.

Health Care

Through the first three quarters of the year, the health care sector of the S&P 500® Index advanced 5.6%, underperforming the overall index, which rose 20.6%. We view the sector’s multi-year outlook positively based on a range of industry trends, especially the innovation occurring across a broad range of company types, products, and business models. However, the biotechnology and pharmaceuticals sectors continue to be affected by continuing political campaign discussions of, and competing proposals to address, drug pricing.

Spotlight

We see the life sciences tools and services and health care equipment & supplies sectors as more resilient to macroeconomic, political, and policy-related headwinds. Biotechnology companies in China, where drug-pricing issues are uncorrelated to U.S. developments, also represent an opportunity.

Financials

Shares of the S&P 500® Index’s financial sector have performed mostly on par with the broad market so far in 2019. Valuations also remain compelling with the sector currently trading at a P/E of 12x versus the S&P 500® Index at 19x based on 2019 estimated earnings. While slower global growth has led to multiple contraction in cyclical and rate-sensitive industries such as financials, certain areas can be relative safe havens in this environment.

Spotlight

We believe areas with outsized growth, such as financial technology, can be sources of additional alpha generation. Financial technology companies, such as payment processors, were able to buck the broader industry trend and outperform recently with their secular growth profile and business models less exposed to the economic cycle.

Midstream Infrastructure

The midstream infrastructure sector as measured by the Alerian MLP Index gained 11.08% year-to-date, outperforming the broader energy sector within the S&P 500® Index. Midstream companies reported decent second quarter 2019 earnings results, with strong distributable cash flow (DCF) per share nearly 10% higher versus the same period last year. While the market has shifted its focus on trying to assess the impacts from exploration and production (E&P) companies’ 2020 capital decisions (e.g., production and capex spending), Jennison believes select midstream stocks should continue to see an inflection in free cash-flow growth into 2020 and beyond as new projects get placed into service and volumes continue to rise.

Spotlight

We favor firms with integrated business models as they have higher barriers to entry and offer the lowest cost infrastructure from the wellhead to the burner top—by providing gathering & processing, transportation, and the storage & delivery of hydrocarbons to end users and to export markets.

Utilities

The utility sector has been the best-performing sector within the S&P 500® Index over the last 12-month period ended 9/30/2019, posting returns of 27.10%, outperforming the broader market (S&P 500® Index) by over 2,280 bps, given the uncertain macro environment and the shift in market sentiment to defensive stocks. We believe the utilities sector represents a compelling value proposition for investors in a slowing growth and falling global bond yield environment given its defensive characteristics; stable, high dividends; and strong longer-term growth areas like renewables. We currently favor industries and sub-industries such as regulated utilities, renewable electricity, gas distribution companies and communications infrastructure.

Spotlight

We see continued momentum across multiple fronts that support ongoing investment and usage in renewable electricity, providing unique investment opportunities over the long term. Improving economics in renewables such as wind and solar power remain a growth driver for the overall sector. Companies now have renewables incorporated into their capex strategy plans (versus five years ago when renewables weren’t included)—allowing those utilities to earn a regulated rate of return on their renewable investments.

For more details, read the full Market Review and OutlookPDF opens in a new window, which is available for financial professionals.


Footnotes

The views expressed herein are those of Jennison Associates investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither Prudential Financial, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation.

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.

For compliance use only 1027547-00001-00 Ed. 10/2019

Disclaimer

Consider a fund's investment objectives, risks, charges and expenses carefully before investing. The prospectus and the summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and the summary prospectus. Read them carefully before investing.

An investment in our money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the funds seek to preserve the value of your clients investment at $1.00 per share, it is possible to lose money by investing in the funds.

Mutual fund investing involves risk. Some mutual funds have more risk than others. The investment return and principal value will fluctuate and investor's 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. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. There is no guarantee a Fund's objectives will be achieved. The risks associated with each fund are explained more fully in each fund's respective prospectus. Consult with your attorney, accountant, and/or tax professional for advice concerning your particular situation.

This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. Clients seeking information regarding their particular investment needs should contact a financial professional.

Investment products are distributed by Prudential Investment Management Services LLC, a Prudential Financial company, member SIPC. Separately Managed Accounts are offered through our affiliates. Jennison Associates and PGIM, Inc. (PGIM) are registered investment advisors and Prudential Financial companies. QMA is the primary business name of QMA LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM. © 2019 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, PGIM Real Estate, PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

Prudential Financial, Inc. of the United States is not affiliated with Prudential plc. which is headquartered in the United Kingdom.

Investment Products: Are not insured by the FDIC or any other federal government agency, may lose value, and are not a deposit of or guaranteed by any bank or any bank affiliate.