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Quick Take: 5 Key Insights from the 2023

Opportunities and Risks in a Changing World

The global economy has followed an unpredictable path in 2023. Resilient growth and persistent inflation have kept central banks in a hawkish mood, raising expectations that a new higher-for-longer regime is taking hold. The trade landscape is also changing at a rapid pace, as intensifying competition around the world drives a surge in fiscal support for domestic industries. Meanwhile, conflicts in Europe and the Middle East have made instability a fixture on the global stage.

At the 2023 EMEA Investment Forum in London, PGIM hosted an afternoon of discussion, debate, and peer-to-peer networking  to help investors assess the market outlook, explore the geopolitical forces reshaping the economy, and identify emerging opportunities across public and private markets.  Below are our 5 key insights from the day: 

1. GREAT-POWER COMPETITION IS RESETTING THE GEOPOLITICAL ENVIRONMENT

“The unipolar moment of great moderation is over, and it’s not coming back anytime soon.” 
– Daleep Singh, Head of Global Macroeconomic Research, PGIM Fixed Income

With the era of great moderation at an end, the global economy is entering a period of elevated volatility and shocks. An increase in great-power competition, which raises implications across public policy, the global economy and technological innovation, is creating a more bifurcated world. Fiscal policy now sits centre stage, and legislative-driven fiscal expansion will likely dictate the path for central banks as deficits grow. While this environment increases market risks, the return of industrial policy in the West may introduce new opportunities for competitive advantages.

Globalisation is not gone, but it is slowing. Through industrial policy, the US and Europe are focused on expanding domestic capacity for critical goods, energy and technology, inspired in part by national security concerns and disruptions to global supply chains. Technology has emerged as the main theatre of geopolitical competition, with nations seeking to de-risk from China.

As tensions between China and the West intensify, FDI and portfolio flows may come under greater scrutiny, with the fusion of China’s military and commercial sectors drawing the attention of policymakers. It will also be prudent for investors to brace for recurring periods of imbalance between global energy supply and demand during the transition away from traditional power sources.

2. MACRO OUTLOOK: HOW INVESTORS CAN CHART A COURSE THROUGH VOLATILE MARKETS

“If we think we are in this world of great-power competition, and the world is going to look different going forward, then central banks are going to have to do more of the heavy lifting.”
 – Katharine Neiss, Deputy Head of Global Economics and Chief European Economist, PGIM Fixed Income

The US economy has been more resilient than expected in 2023, defying forecasts for a recession. Consumer spending has underpinned this period of resilience and showcased the positive effect that excess savings can have on overall growth. Structural forces—mainly, an influx of government spending through fiscal policy such as the Inflation Reduction Act—may be masking cyclical weakness, with household savings on the decline and total output appearing soft when compared with GDP growth.

In Europe, the weaponisation of natural gas raised recession fears last winter, but the region was largely able to navigate through a potential crisis. Growth has been stagnant, and the European Central Bank has been aggressive in raising rates to bring down inflation. There’s a risk that next year, Europe faces a more severe recession as a consequence of higher rates.

Recent macro trends have led investors to reassess the market landscape, and a higher-for-longer view has taken hold. A reduction in savings amid higher government deficits, coupled with increased investments in manufacturing, technology and the energy transition, have lifted rate forecasts. The Federal Reserve has adopted a wait-and-see approach with the path for inflation and growth still coming into focus. Market volatility can be expected given this uncertainty around the outlook.

3. AN EVOLVING ESG REGULATORY LANDSCAPE PRESENTS NEW INVESTMENT IMPLICATIONS

“Ignore the noise on SFDR and SDR”
– Vanessa Hodge, Partner and Sustainability Lead, Mercer

In an increasingly complicated and regulated environment, it is becoming more evident that asset owners need clarity in their approach when integrating ESG into their strategic asset allocations. SFDR and SDR leap to the implementation stage, which can detract from the important sustainable investment pathway that should be defined upfront. This means managing ESG in distinct stages, such as: 1) Defining your investment principles and identifying the structural trends that are material to your board 2) Building these principles and accountability for them into your policy definitions and 3) Outlining management, monitoring and reporting processes. Only then should investors think about investing, with a framework against which they can benchmark asset managers from an integration, investment, stewardship or exclusionary perspective. 

4. THE INVESTMENT LANDSCAPE IS CHANGING IN THREE IMPORTANT WAYS

“If we believe we have the right questions, there are analytic ways that we can begin to craft the portfolio around these changes.”
 – David Hunt, CEO, PGIM

By understanding how financial markets and the global economy are evolving, investors can build portfolios that both mitigate risk and capture emerging opportunities. Heading into 2024, three investment themes are emerging. First, the world is becoming more bipolar, elevating geopolitical uncertainty and reshaping global trade. Second, the world is entering a new era in which rates are poised to remain higher for longer, bringing an end to the hunt for yield. Third, private markets are taking up a greater role in institutional portfolios. Economies are increasingly being funded by investors rather than banks, leading to new opportunities in asset classes that may not have previously been part of investors’ portfolios.

5. PRIVATE MARKETS AND NEW TECH PRESENT A BROAD SET OF OPPORTUNITIES

“We are in this permacrisis sort of environment. What does that mean for markets? No one has a crystal ball...but these episodes of volatility for long-only and long-duration investors present real pockets of opportunity to lock in those increment deals and provide certainty to the borrowers that crave it.” – Michael Eakins, CIO and Group Executive Committee Member, Phoenix Group

The current environment calls for greater diversification, making an allocation toward private markets attractive. Institutional investors can uncover opportunities across infrastructure and real estate, particularly as distressed assets create higher return potential going forward. In private credit, investors can work more closely with borrowers to restructure existing assets during periods of volatility. But identifying managers who have the expertise to identify opportunities and challenges in private markets—and manage existing assets—through the current cycle is critical.

Meanwhile, the evolution of AI and the tech sector will have broad implications across the investment landscape in the years ahead. Advancements in generative AI, blockchain and other innovations are poised to set off a surge in productivity. However, winners and losers will no doubt reveal themselves. Companies, sectors and regions that are slow to adapt will be less likely to emerge as winners in the AI era.