2024 Investment themes
Against a backdrop that warrants selectivity and the flexibility to act as conditions evolve, PGIM asset managers highlight key trends set to shape 2024 and identify opportunities that they believe show significant promise.
Theme 01
Fixed income enters golden age
Gregory Peters
Co-Chief Investment Officer
PGIM Fixed Income
Theme 05
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 03
Consolidation drives reIT rebound
Rick Romano, CFA
Head of Global Real Estate Securities
PGIM Real Estate
Theme 04
Private real estate BENEFITS FROM deep discounts
Darin Bright
Head of U.S. Core Plus Investment PlatformPGIM Real Estate
Theme 06
Direct indexing goes mainstream
Robert Holderith
Head of PGIMCustom Harvest
Theme 07
KEEPING IT REAL IN RETIREMENT GAINS IMPORTANCE
Jeremy Stempien
Portfolio ManagerPGIM DC Solutions
Fixed income enters golden age
Theme 01
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Gregory Peters
Co-Chief Investment Officer
PGIM Fixed Income
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Head of Direct LendingPGIM Private Capital
Matthew Harvey
PRIVATE CREDIT PROFITS AS BANKS RETREAT
Theme 05
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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
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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-capitalized 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 privatization trends in the REIT sector as the macro environment stabilizes 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 digitalization, demographics, and decarbonization.
Head of Global Real Estate Securities
PGIM Real Estate
Rick J. Romano, CFA
Consolidation drives reIT rebound
Theme 03
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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-capitalized 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 04
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Head of PGIMCustom Harvest
Robert Holderith
Direct indexing goes mainstream
Theme 06
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Portfolio ManagerPGIM DC Solutions
Jeremy Stempien
KEEPING IT REAL IN RETIREMENT GAINS IMPORTANCE
Theme 07
There are a myriad of risks investors have to deal with in order to achieve a successful retirement. One risk that is increasingly a concern among investors is inflation. While inflation is moderating, it is likely to remain elevated (for the foreseeable future), making it important for retirement income seekers to hedge it in their portfolio allocations. Looking at returns among various asset classes during different inflationary environments reveals that certain asset classes, such as cash and stocks, appear mostly unaffected by elevated inflation, while others, such as aggregate bonds, tend to struggle. Commodities and REITs, in particular commodities, are notably higher during higher inflationary periods. This demonstrates the potential value of including these assets classes in a portfolio, since they tend to outperform when inflation is higher. While real assets should be considered for all portfolios, they can be especially valuable for retirees, given the goal of generating income for life, adjusted by inflation.
Equity markets continued their recovery from the previous year’s lows in 2023. Investors cheered the headline numbers, but dispersion was high. Over the past 2.5 years, many investor portfolios have struggled to deliver positive returns as performance was punctuated with a bear market in 2022. Able to take advantage of volatility in its pursuit of index topping after-tax returns, direct indexing has the potential to play a bigger role in investment management. Looking ahead, there’s no reason to believe that intersector volatility won’t continue. Direct indexing stands ready to capitalize on it. Once limited to high-net-worth investors with extremely large investment portfolios, this investment strategy is now poised for broader adoption and with it the potential to generate better outcomes for many more investors.
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: 2/1/1995, 5/16/2000, 6/29/2006, 12/19/2018). 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 9/30/2023. Public REITs represents the FTSE NAREIT All Equity REITs Index.
Past performance does not guarantee future results.
Source: Cliffwater Direct Lending Index as of 9/30/2023. Return is annual returns from 2016-2022 and YTD returns as of 9/30/2023. 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 11/30/2023. Past performance does not guarantee future results.
Source: Morningstar Direct. Annualized data based on average monthly returns from January 1991 to December 2022 (384 months) for five asset classes. Cash (ICE BofA U.S. 3-month Treasury Bill), Aggregate Bonds (Bloomberg U.S. Aggregate Bond), Stocks (Russell 3000 Index), Commodities (Bloomberg Commodity Index), and REITs (FTSE Nareit All Equity REITs Index). Inflation is defined using the IA SBBI series and the monthly inflation breakpoint is 0.5%. The average annualized inflation during the lower inflation periods is approximately 1.3% versus 8.4% for the higher inflation periods. Past performance does not guarantee future results.
Source: Morningstar Direct as of 12/31/2022. 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.
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Source: Morningstar. Average returns following the end of each of the past four Fed rate hike cycles (end dates used: 2/1/1995, 5/16/2000, 6/29/2006, 12/19/2018). 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.
Source: Morningstar Direct as of 9/30/2023. Public REITs represents the FTSE NAREIT All Equity REITs Index.
Past performance does not guarantee future results.
Source: Morningstar Direct as of 12/31/2022. 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 9/30/2023. Return is annual returns from 2016-2022 and YTD returns as of 9/30/2023. 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 10/31/23. Past performance does not guarantee future results.
Source: Morningstar Direct. Annualized data based on average monthly returns from January 1991 to December 2022 (384 months) for five asset classes. Cash (ICE BofA U.S. 3-month Treasury Bill), Aggregate Bonds (Bloomberg U.S. Aggregate Bond), Stocks (Russell 3000 Index), Commodities (Bloomberg Commodity Index), and REITs (FTSE Nareit All Equity REITs Index). Inflation is defined using the IA SBBI series and the monthly inflation breakpoint is 0.5%. The average annualized inflation during the lower inflation periods is approximately 1.3% versus 8.4% for the higher inflation periods. Past performance does not guarantee future results.
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Against a backdrop that warrants selectivity and the flexibility to act as conditions evolve, PGIM asset managers highlight key trends set to shape 2024 and identify opportunities that they believe show significant promise.
2024 Investment themes
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Bonds provide better risk-adjusted returns vs. stocks after rate hike cycles.
The chart shows the average three-year annualized standard deviations and average three-year annualized returns following the end of each of the past four Fed rate hike cycles for U.S. Aggregate Bonds, Short-term Bonds, Global Aggregate Bonds, Leveraged Loans, High Yield Bonds, U.S. Treasury, IG Corporate, and EM Debt.
Growth beats value in below-average economic growth environments.
The chart shows returns of the Russell 1000 Growth Index and the Russell 1000 Value Index when the average annual GDP from 1979 to 2022 was above and below the average GDP growth
Strong REIT rebounds historically followed large drawdowns.
The chart shows the FTSE NAREIT All Equity REITs Index’s returns for the following periods: period 1 from 7/31/1987 to 10/31/1987, period 2 from 7/31/1989 to 10/31/1990, period 3 from 12/31/1997 to 11/30/1999, period 4 from 1/31/2007 to 2/28/2009, period 5 from 1/31/2020 to 3/31/2020, the average from period 1 to 5, and the current period from 12/31/2021 to 9/30/2023.
Private real estate has a long history of strong risk-adjusted returns.
The chart shows the 20-year annualized standard deviations and 20-year annualized returns for private real estate, stocks, bonds, and public REITs as of December 31, 2022.
Private credit has delivered consistently stronger yields and returns versus related public markets.
The chart shows annual returns and yields for private credit, leveraged loans, and high yield bonds from 2016 to 2022 and YTD through June 30, 2023.
2023 sector returns and drawdowns.
The chart shows the YTD returns and maximum drawdowns for the S&P 500 Index and its sectors, including Information Technology, Communication Services, Consumer Discretionary, Industrials, Materials, Financials, Real Estate, Health Care, Consumer Staples, Energy, and Utilities through November 30, 2023.
Asset class returns in different inflationary environments. The chart shows annualized average monthly returns from January 1991 to December 2022 for cash, aggregate bonds, stocks, commodities, and REITs during the lower inflation periods and higher inflation periods.
The chart shows the average three-year annualized standard deviations and average three-year annualized returns following the end of each of the past four Fed rate hike cycles for the S&P 500 Index (22% volatility and 9% return), U.S. Aggregate Bonds (4% volatility and 8% return), Short-Term Bonds (3% volatility and 7% return), Global Aggregate Bonds (5% volatility and 8% return), Leveraged Loans (7% volatility and 3% return), High Yield Bonds (6% volatility and 7% return), IG Corporate (6% volatility and 9% return) and EM Debt (9% volatility and 14% return).
Bonds provide better risk-adjusted returns vs. stocks after rate hike cycles
The chart shows returns of the Russell 1000 Growth Index and the Russell 1000 Value Index when the average annual GDP from 1979 to 2022 was above and below the average GDP growth. Above average GDP growth had 15.6% growth return and 16.7% value return, while below average GPD growth had 10.5% growth return and 7.4% value return.
Growth beats value in below-average economic growth environments
The chart shows the FTSE NAREIT All Equity REITs Index’s drawdowns and 12-month returns after the drawdowns for the following periods: period 1 from 7/31/1987 to 10/31/1987 had -17.9% drawdown and 21.0% rebound in returns, period 2 from 7/31/1989 to 10/31/1990 had -23.9% drawdown and 36.0% rebound in returns, period 3 from 12/31/1997 to 11/30/1999 had -23.7% drawdown and 21.8% rebound in returns, period 4 from 1/31/2007 to 2/28/2009 had -68.3% drawdown and 95.2% rebound in returns, period 5 from 1/31/2020 to 3/31/2020 had -24.2% drawdown and 34.2% rebound in returns, the average periods from 1 to 5 had -31.6% drawdown and 41.6% rebound in returns, and the current period from 12/31/2021 to 9/30/2023 had -29.2% drawdown and 0.0% rebound in returns.
Strong REIT rebounds historically followed large drawdowns
Private real estate has a long history of strong risk-adjusted returns
The chart shows the 20-year annualized standard deviations and 20-year annualized returns for private real estate (8.1% volatility and 8.4% return), stocks (19.3% volatility and 9.8% return), bonds (4.0% volatility and 3.1% return) , and public REITs (29.7% volatility and 9.4% return) as of December 31, 2022. It also states that private real estate has provided less volatility than public REITs, which have delivered stronger returns. Private real estate has provided 86% of the return of stocks with 42% of the volatility.
Private credit has delivered consistently stronger yields and returns versus related public markets
The chart shows annual returns and yields for private credit, leveraged loans, and high yield bonds from 2016 to 2022 and YTD through September 30, 2023. Yields and returns for private credit have been stronger than those of leveraged loans and high yield during these time periods.
2023 sector returns and drawdowns
The chart shows the YTD returns and maximum drawdowns for the S&P 500 Index (19.0% return and -10.3% drawdown) and its sectors, including Information Technology (50.7% return and -11.5% drawdown), Communication Services (47.3% return and -13.3% drawdown), Consumer Discretionary (33.0% return and -16.0% drawdown), Industrials (8.6% return and -12.9% drawdown), Materials (5.6% return and -13.1% drawdown), Financials (4.5% return and -16.5% drawdown), Real Estate (0.3% return and -23.2% drawdown), Health Care (-3.7% return and -9.7% drawdown), Consumer Staples (-4.5% return and -13.4% drawdown), Energy (-4.6% return and -18.2% drawdown), and Utilities (-11.7% return and -22.2% drawdown) through November 30, 2023.
Asset class returns in different inflationary environments
The chart shows annualized average monthly returns from January 1991 to December 2022 for cash, aggregate bonds, stocks, commodities, and REITs during the lower inflation periods and higher inflation periods. Cash had 2.6% returns during lower inflation periods and 2.2% returns in higher inflation periods. Aggregate bonds had 5.8% returns during lower inflation periods and 1.2% returns in higher inflation periods. Stocks had 11.4% returns during lower inflation periods and 12.2% returns during higher inflation periods. Commodities had 1.3% returns during lower inflation periods and 18.5% returns during higher inflation periods. REITs had 11.8% returns during lower inflation periods and 17.0% returns during higher inflation periods.