A Bumpy Road to a Familiar Low-growth Destination
PGIM Fixed Income explains why it expects to see secular factors overtake cyclical trends as already-building headwinds slow the global economy.
The Great Balancing Act
PGIM asset managers assess key trends shaping the investment landscape and where to find opportunities for different economic scenarios.
Investors rode a roller coaster during the first half of 2022, with extraordinary events presenting significant challenges. Surging inflation from the ongoing war in Ukraine and renewed COVID-19 lockdowns in China continue to cloud the outlook for global economies, financial markets, and central bank monetary policies. Against this confusing backdrop, our PGIM asset managers assess the current landscape, share perspectives on key trends set to shape the second half of 2022 and beyond, and offer ideas for investors seeking to capitalize on the opportunities ahead.
THE MACRO BACKDROP
Economic activity has slowed amid rising costs and supply disruptions following Russia’s invasion of Ukraine. Economists have generally lowered global growth expectations since the beginning of the year, especially for Europe, where the war’s impact is high. Despite strong consumption and business spending, imports and inventory have dragged down growth. Nevertheless, global economic growth continues, although recent data have been mixed. In the U.S., the Fed has sharply pivoted in a hawkish direction to combat surging inflation. While the odds of a U.S. recession are still subdued for the near term, recession risks rise substantially as we look out to 2023. Fallout from the war in Ukraine could push the eurozone economy into recession, given rising energy costs and disrupted supply chains. Emerging markets (EM) growth expectations have been revised lower given the war’s impact and a slowdown in China.
Global inflation remains elevated despite the consensus view that the worst may be behind us. While goods prices show signs of moderating, service sector inflation continues a steady rise. Developed market inflation also remains high due to the spike in oil and food costs. High and persistent inflation, the longer it remains, risk becoming embedded in inflation expectations, fueling demand for wage increases, and becoming a self-fulfilling prophecy.
The Fed and other major central banks are focused on tightening monetary policy to tame inflation, which surged beyond their earlier expectations. The ECB confirmed that it would conclude net asset purchases by July 1 and start its rate hike cycle at its July meeting. The Bank of Japan remains an exception, making no changes to its current policy stance and framework yet. Central banks in EM continue to raise rates, as most are facing inflation above their target range.
While a multitude of risks remain, equity markets are already pricing in a high risk of recession with many markets experiencing drawdowns of more than 20%. While stocks could fall further on concerns over the Russia-Ukraine war, persistent inflation, and COVID lockdowns in China, the Chicago Board Options Exchange Volatility Index is already at historically elevated levels. Given improved stock market valuations and low odds of an imminent U.S. recession, stocks could experience a powerful relief rally from here.
While we are resisting becoming increasingly bearish on stocks in the context of market declines, we are still pursuing a fairly cautious investment strategy. We are neutral on stocks in our multi-asset portfolios, while overweighting commodities and cash and underweighting fixed income. The outlook for fixed income returns looking forward has improved significantly on notably higher yields on 10-year U.S. Treasury notes and wider spreads on fixed income risk assets. We are considering increased exposure here.
2H 2022 INVESTMENT THEMES
Credit Markets Favor Alpha Over Beta
PGIM Fixed Income discusses reasons for its near-term caution but long-term optimism and where to find opportunities for different economic scenarios.
Outlook Improves for Growth Stocks
Jennison Associates explains why growth stocks are likely to regain investor favor and how lower valuations may present an attractive entry point for investors.
Real Assets Outshine if Inflation Persists
PGIM Quantitative Solutions explains why inflation may linger longer this time and how adding real assets to portfolios can help mitigate inflation risks.
Real Estate Poised to Perform Going Forward
PGIM Real Estate discusses how real estate is well-prepared for what comes next and can help investors mitigate both inflation and interest rate risks.
Agile Alternatives Diversify Amid Macro Uncertainty
PGIM Wadhwani explains why portable alpha approaches with low correlations to stocks and bonds are well suited to today’s challenging investment landscape.
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The views expressed in this video are of PGIM Investments professionals as of the time of writing 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 as an offer to sell or a solicitation to buy any securities mentioned herein. Any projections or forecasts presented herein are subject to change. This commentary does not purport to provide any legal, tax or accounting advice. 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.
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