Theme 01
Fixed income enters golden age
Gregory Peters
Co-Chief Investment Officer
PGIM Fixed Income
Theme 06
PRIVATE CREDIT PROFITS AS BANKS RETREAT
Matthew Harvey
Head of Direct LendingPGIM Private Capital
Theme 02
NEW SECULAR GROWTH CYCLE ACCELERATES
Mark Baribeau, CFA
Head of Global EquityJennison Associates
Theme 04
Consolidation drives reIT rebound
Rick Romano, CFA
Head of Global Real Estate Securities
PGIM Real Estate
Theme 05
Private real estate BENEFITS FROM deep discounts
Darin Bright
Head of U.S. Core Plus Investment PlatformPGIM Real Estate
Theme 03
decarbonisation efforts intensify
Jay Saunders
Carbon Solutions Strategy
Portfolio Manager
Jennison Associates
Fixed income enters golden age
Theme 01
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Gregory Peters
Co-Chief Investment Officer
PGIM Fixed Income
Head of Direct LendingPGIM Private Capital
Matthew Harvey
PRIVATE CREDIT PROFITS AS BANKS RETREAT
Theme 06
The global economy has shown resilience thus far, but is pointing to a slowdown in 2024. If a recession can be avoided, we believe equities should fare well, albeit with more modest returns than 2023. Investors should shift their focus to fundamental drivers of equity returns as rates appear to have peaked and tightening policy nears its end. Although equity markets have largely priced in the new rate realities, valuations still remain below historical averages, creating a balanced setup of valuations going forward. Stocks with durable earnings growth become more attractive as the broader economy slows, which should bode well for growth stocks as the economy slows. Today’s innovative secular themes are both disruptive and resilient to macro conditions, with artificial intelligence driving revolutionary change across most industries.
Head of Global EquityJennison Associates
Mark Baribeau, CFA
NEW SECULAR GROWTH CYCLE ACCELERATES
Theme 02
As the real estate market has been adjusting to elevated interest rates, valuations have significantly compressed although the magnitude varies widely by region. We believe we’re in the early stages of a Great Consolidation in the real estate market. Well-capitalised firms have a long shopping list of attractive properties, which they can now buy for steep discounts. While consolidation has already started in many areas, we expect to see increased M&A activity and strong privatisation trends in the REIT sector as the macro environment stabilises and credit markets open up, which should raise REIT asset prices and fuel a strong rebound. Investment opportunities will be driven by a combination of better entry prices and rental growth prospects underpinned by structural shifts in occupier trends, including digitalisation, demographics, and decarbonisation.
Head of Global Real Estate Securities
PGIM Real Estate
Rick J. Romano, CFA
Consolidation drives reIT rebound
Theme 04
Income remains resilient as repricing continues in the real estate sector. Further value declines would likely be due to pressure on cap rates from higher interest rates, not falling property incomes. With interest rate stability on the horizon, now may be a compelling entry point for long-term investors. Currently depressed commercial real estate prices offer well-capitalised private real estate companies a historic opportunity to buy properties at deep discounts. Investment opportunities presented during a recessionary environment include equity repricing, which provides attractive cost-basis opportunities and select tactical opportunities at the bottom of the cycle. We see significant upside potential over the long term in broadly diversified real estate assets with strong and sustainable income with compelling growth potential tied to exposure to rapidly evolving societal trends.
Head of U.S. Core Plus Investment PlatformPGIM Real Estate
Darin Bright
Private real estate BENEFITS FROM deep discounts
Theme 05
Carbon Solutions Strategy
Portfolio Manager
Jennison Associates
Jay Saunders
DECARBONISATION EFFORTS INTENSIFY
Theme 03
The transition to a lower-carbon global economy is a mammoth undertaking requiring massive spending over an extended period to redefine humankind’s relationship with energy. In 2022, there was a record $1.1 trillion spent in global energy transition investments towards decarbonisation. Global investments across all transition technologies need to average $5.3 trillion annually from 2023 to 2050 to remain on the pathway that limits global warming to 1.5ºC. The large gap showcases the need to accelerate the mission by quadrupling investments—a massive undertaking that countries around the world are starting to plan for. From rethinking basic materials to cutting-edge technology, ongoing carbon-reduction efforts are poised to upend industries and inspire motivation on a level that remains largely underappreciated. In these early innings of the energy transition, we believe the opportunity is most compelling among companies that are positioned to help drive this transition and keep up with changes in the supply chain.
The end of the Great Moderation is introducing an era of volatility in growth and inflation. Investors are adjusting to the contours of the new global paradigm, but ultimately, a new regime of higher bond yields makes fixed incomes assets very attractive for long-term investors. Despite a challenging macro environment for investors, we believe we’re entering a golden age in fixed income investing with a broad range of fixed income sectors well-positioned for solid risk-adjusted returns over the long term.
The brutal year in bonds in 2022 and the aggressive rate hikes that followed in 2023 are stressing balance sheets in banking. With continued uncertainty about monetary policy and the economy, banks are tightening their belts. The situation is likely to translate into reduced bank lending in 2024, especially to midsized businesses as banks focus their exposure to larger companies. Fortunately, middle-market companies now have a compelling alternative in private credit, or non-bank institutional lending. Reminiscent of what happened during the Global Financial Crisis, the financial gap created by decreased bank lending to midsized businesses will increasingly be filled by private credit lenders. With notional yields near the highest levels seen in 20+ years and expected to remain elevated for the foreseeable future, there is a strong opportunity to generate alpha through private credit investments. Private credit can be a powerful complement to traditional portfolio allocations, offering enhanced income and return potential, diversification, and resilience.
Source: FRED, Morningstar. Based on average annual data for real GDP from 1979-2022. Growth represented by Russell 1000 Growth Index. Value represented by Russell 1000 Value Index. Past performance does not guarantee future results.
Source: Morningstar. Average returns following the end of each of the past four Fed rate hike cycles (end dates used: 1/2/1995, 16/5/2000, 29/6/2006, 19/12/2018). U.S. Aggregate Bonds = Bloomberg U.S. Aggregate Bond Index, Short-term Bonds = Bloomberg Credit 1-5 Year Index, Global Aggregate Bonds = Bloomberg Global Aggregate Index, Leveraged Loans = Credit Suisse Leveraged Loan Index, High Yield Bonds = Bloomberg U.S. Corporate High Yield Index, U.S. Treasury = Bloomberg U.S. Treasury Index, IG Corporate = Bloomberg U.S. Credit Index, EM Debt = JP Morgan EMBI Diversified Index. Past
performance does not guarantee future results.
Source: Morningstar Direct as of 30/9/2023. Public REITs represents the FTSE NAREIT All Equity REITs Index. Past performance does not guarantee future results.
Source: Cliffwater Direct Lending Index as of 30/9/2023. Return is annual returns from 2016-2022 and YTD returns as of 30/9/2023. Yield calculated by averaging quarterly yields for year. Bloomberg High Yield Corporate Index (High Yield Bonds), Morningstar LSTA U.S. Leveraged Loan Index (Leveraged Loans), Cliffwater Direct Lending Index (Private Credit). Private Credit yield represented by Cliffwater Direct Lending Index 3-year takeout yield, Leveraged Loans and High Yield Bonds represented by yield to maturity. Past performance does not guarantee future results.
Source: Statista, Bloomberg NEF as of June 2023.
Source: Morningstar Direct as of 31/12/2022. Private Real Estate represented by NCREIF Fund, Public REIT represented by FTSE NAREIT All Equity Index, Bonds represented by Bloomberg U.S. Aggregate Bond Index, Stocks represented by S&P 500. Past performance does not guarantee future results.
Source: Morningstar. Average returns following the end of each of the past four Fed rate hike cycles (end dates used: 1/2/1995, 16/5/2000, 29/6/2006, 19/12/2018). U.S. Aggregate Bonds = Bloomberg U.S. Aggregate Bond Index, Short-term Bonds = Bloomberg Credit 1-5 Year Index, Global Aggregate Bonds = Bloomberg Global Aggregate Index, Leveraged Loans = Credit Suisse Leveraged Loan Index, High Yield Bonds = Bloomberg U.S. Corporate High Yield Index, U.S. Treasury = Bloomberg U.S. Treasury Index, IG Corporate = Bloomberg U.S. Credit Index, EM Debt = JP Morgan EMBI Diversified Index. Past performance does not guarantee future results.
Source: FRED, Morningstar. Based on average annual data for real GDP from 1979-2022. Growth represented by Russell 1000 Growth Index. Value represented by Russell 1000 Value Index. Past performance does not guarantee future results.
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Source: Morningstar Direct as of 30/9/23. Public REITs represents the FTSE NAREIT All Equity REITs Index.
Past performance does not guarantee future results.
Source: Morningstar Direct as of 31/12/22. Private Real Estate represented by NCREIF Fund OCDE, Public REIT represented by FTSE NAREIT All Equity Index, Bonds represented by Bloomberg U.S. Aggregate Bond Index, Stocks represented by S&P 500. Past performance does not guarantee future results.
Source: Cliffwater Direct Lending Index as of 30/9/2023. Return is annual returns from 2016-2022 and YTD returns as of 30/9/2023. Yield calculated by averaging quarterly yields for year. Bloomberg High Yield Corporate Index (High Yield Bonds), Morningstar LSTA U.S. Leveraged Loan Index (Leveraged Loans), Cliffwater Direct Lending Index (Private Credit). Private Credit yield represented by Cliffwater Direct Lending Index 3-year takeout yield, Leveraged Loans and High Yield Bonds represented by yield to maturity. Past performance does not guarantee future results.
Source: Morningstar Direct as of 31/10/23. Past performance does not guarantee future results.
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Global annual transition technology investment needed to remain on 1.5ºC pathway from 2023 to 2050
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