Capitalize on Emerging Markets Dynamism
Benefit from the evolving opportunity set by identifying strong growers early.
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, signalling 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. Now is the time to outsmart the transitioning markets, and discover opportunities in growth equity, fixed income, real estate and alternatives in a recovering global landscape.
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.
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.
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.
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.
Inflation has risen sharply in 2021 thanks to base effects, higher commodity prices, pent-up demand, and fiscal easing. While we expect that pricing pressures should abate somewhat in the second half of the year, we’re not convinced that inflation will drop back as much as generally expected. While the low base year effects from 2020 will abate, demand is set to run above supply for a while. Additionally, the rise in commodity prices reflects more than just a recovery with most commodity markets in backwardation, pointing to higher future prices than currently expected. We believe the path forward will hinge on one of the following three scenarios coming to fruition.
For Professional Investors only. All investments involve risk, including the possible loss of capital.
Past performance is no guarantee of future results. The views expressed herein are those of Jennison Associates, PGIM Real Estate, QMA and PGIM Fixed Income investment professionals as of 28 July 2021 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. 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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