Actively Capitalising on a New Market Regime
Against the evolving backdrop, PGIM asset managers highlight key trends set to shape 2024 and identify opportunities that they believe show significant promise.
Equities had a strong 2023 even though performance was concentrated in a handful of growth stocks. While some of the banking system-related troubles continued to keep markets volatile, stocks—especially in the Information Technology sector—surged amid excitement around artificial intelligence. Government bonds struggled, pressured by sticky inflation and rate hikes in 2023. The Bloomberg U.S. Aggregate Bond Index has yet to fully erase its losses from 2022, setting it up for at least some potential gains in 2024.
Inflation has moved steadily lower, with some hiccups, since peaking in 2022. While the Fed’s urgency in hiking seems to have done its job, any stubbornness in inflation coming down to target could keep the Fed on hold for longer, wrong-footing market participants for the umpteenth time. It's hard to see a resurgence of higher rates, barring unforeseen events or shocks. Those aside, lower inflation and a dovish Fed point toward rates being flat to lower from this point forward, albeit with some higher-than-usual volatility as the Fed remains data-dependent.
A U.S. recession does not appear to be in sight. Hard data remains resilient and soft data appears to have bottomed with even the weakest parts of the economy, such as housing and manufacturing, seemingly turning a corner. As we look ahead to 2024, economic and market resilience seem to have legs, and we believe that the probability of a significant left-tail outcome has lessened.
Following modest growth in 2023, consensus expectations are for low double-digit growth in 2024 as the economy cools, with many industries having already experienced an earnings recession and a tightening of purse strings, setting the stage for margins to improve. Labor productivity has also accelerated in recent quarters. Even if current expectations get revised lower, earnings growth could still turn out moderate barring a hit to sales due to a significant slowdown in the economy. Outside the U.S., expectations are for moderate growth in other developed markets and for a double-digit rebound in emerging markets after declines over the past two years.
Higher rates and slower growth are likely to keep major asset classes volatile, reducing the confidence to handicap their relative risk-adjusted performance in 2024. Investors face a dramatically different landscape for building diversified multi-asset portfolios than in the period prior to the Fed’s latest hiking cycle. Equity/bond correlations remained significantly positive heading into 2024 following a generation of the relationship being negative. As such, the traditional hedge that bonds provided investors in periods of equity market turbulence is more tenuous. While higher rates have generally improved our long-term outlook for multi-asset portfolios from a return perspective, building a diversified portfolio has become more challenging in a regime of positive stock/bond correlation.
Outside the U.S., Japanese private consumption will likely be supported by pent-up demand, stronger wage growth, and the government’s new economic stimulus package. Business investment is likely to benefit from the subsidies for green and digital investment and high corporate profits.
Meanwhile, Eurozone economic activity is expected to struggle in early 2024 with the manufacturing overhang. While the U.S. has been able to shake off Fed rate hikes, ECB rate hikes have put the Eurozone economy in a more precarious position. Although private investment will likely remain under pressure until financing costs ease, private consumption continues to be supported by tight labor markets and receding inflation as real incomes improve.
China’s economy is expected to moderate but still grow at a solid pace in 2024. The ongoing transition to a more consumption-led economic model remains fraught with risks. Ongoing adjustment in the real estate sector is driven by falling investment and continued financial stress. Given the diminishing returns from infrastructure spending, the government is moving away from this as the main strategy for boosting growth. Exports are likely a modest contributor given slower global growth and tense trade relations with the U.S., which are unlikely to improve with the upcoming U.S. elections in November 2024.
Commodities returns are likely to be moderate but volatile after a down year in 2023. Tight monetary policy and a strong dollar were negatives in 2023 but could reverse in 2024. OPEC+ is expected to continue to manage supply expectations by maintaining its guidance on supply. However, there are still downside risks from sharply slower global growth and higher-for-longer interest rates.
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
The views expressed herein are those of PGIM investment professionals at the time the comments were made, 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 PFI, 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.
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