Financial markets and the broader economy concluded a remarkably resilient year in 2023, especially when considering early fears that higher interest rates and stress in the banking sector would trigger a recession. Stronger-than-expected economic growth, a healthy labor market, and technological innovations such as AI helped risk assets turn the corner. While investment opportunities continue to emerge across public and private markets, a new year often brings a new set of challenges as well—from macro uncertainty to geopolitical turmoil and a busy slate of elections around the globe.

PGIM gathered a panel of experts from its affiliates to explore the areas where they believe investors will find promising opportunities, which are presented in the 2024 edition of Best Ideas. The following is a summary of the discussion.

• Assessing macro impacts: In all likelihood, the Federal Reserve is done raising rates as inflationary pressures subside and the outlook for growth becomes murkier. This creates a favorable backdrop for fixed income overall and particularly for high-quality securitized credit, where spreads look attractive relative to other fixed-income instruments. Higher rates have also led to stronger yields for existing assets in direct lending, but softer M&A activity constricted deal flows in 2023. More deals started coming to market late in the year, and more opportunities will likely emerge as the M&A market continues to thaw. Businesses in the consumer discretionary sector are feeling stress globally. Challenges have emerged in regions such as the UK where adjustable-rate mortgages are common, causing consumers to adjust their spending. Resilient economic activity and advancements in AI create a positive outlook for growth equities. Momentum has been largely concentrated among large caps, but the new tech cycle is likely to spread from its early beneficiaries.
• Investing in high-quality securitized products: Against a backdrop of elevated macro uncertainty and tight credit spreads, high-quality securitized products stand out as an attractive source of risk-adjusted returns. HQSP securities, characterized by wider spreads and a lower spread duration profile, provide for suitable investments in this environment while we remain tactical down in credit as opportunities arise. Within the sub sectors, the outlook for mortgage credit products looks bullish. Despite higher rates and lower affordability, the housing market has held strong, and credit underwriting has been conservative. In CMBS, the office sector has been under pressure, but new deals are pricing at attractive spreads. In CLOs, AAA and AA CLOs in the US and Europe stand out as attractive investments. There are also opportunities in ABS, particularly unsecured consumer loans, and banking regulations will likely give rise to more private opportunities in ABF.
• Investing in private credit: With the economy seemingly at an inflection point, investors will have greater visibility into what the direct-lending market looks like in 2024 and beyond. The market is sitting on dry powder, and approaching maturity walls portend an increase in refinancing activity. This lays the foundation for a strong year in transaction volumes. The middle market remains underbanked following the Global Financial Crisis with large banks stepping back from lending. Recent stress in commercial banking has amplified this trend. Firms that have developed strong relationships with management teams, navigated a variety of economic cycles, and exhibited discipline in their credit underwriting will be well positioned to capture a competitive edge. It is also crucial to maintain a long-term lens. By building lasting relationships with borrowers, firms will find that originations can remain active regardless of macro conditions.
• Capturing AI opportunities: Recent advances in generative AI represent a wave of technology transformation that will be as significant and long-lasting as the advent of the internet and mobile computing. These advancements will likely change the way that humans and computers interact at a fundamental level. Changes like this only occur every few decades, and it seems likely to have a profound impact throughout the economy over time. One of the biggest differentiators in this space will be the ability for enterprises and consumers to use their own proprietary data within new and existing applications. Companies operating in software, media and advertising, customer service and cybersecurity are positioned to capture early productivity gains as a result of AI, which appears unlikely to herald outright headcount reductions but will instead augment humans. It will be important for investors to watch the regulatory and geopolitical landscape as AI evolves. Policymakers may seek to strike a balance between security concerns and innovation, especially with the technology still in its infancy. Scrutiny of business with China is a risk factor, particularly for the semiconductor industry. However, AI has limited direct exposure to trade tensions in the region, given that Europe and the US are the largest end markets.