Investors underexposed to burgeoning private alternatives: PGIM Investments studyInvestorsunderexposedtoburgeoningprivatealternatives:PGIMInvestmentsstudy

Matt Shafer, the head of international distribution at PGIM Investments, expects private markets to witness a surge in demand over the coming years — echoing the ascension of emerging markets (EM) investing near the turn of the millennium.

“While it took time for investors to fully embrace the intricacies of investing in emerging market equity and debt, it would be hard to argue that a portfolio is adequately diversified today without exposure to the developing world. In the coming years, it is realistic for private markets to be thought of the same way,” Shafer explains.

GATEKEEPER BULLISHNESS ON BOND MARKETS

In terms of expectations for asset class returns over the coming year, gatekeepers are optimistic about the prospects of fixed income — both public and private. In public fixed income, 59% of gatekeepers expect an increase in returns, against just 25% predicting a decrease. In private fixed income, 50% predict an increase versus 26% for a decrease.

With gatekeepers optimistic about bond market returns, it is no surprise that 52% of gatekeepers expect their firm to increase public fixed income allocations over the next year — which is the most of any asset class. Infrastructure and public equities are the next largest targets for increased allocations.

Investment-grade corporates at 54% and government bonds at 47% are the top targets globally for increased fixed income allocations. There is also robust appetite for additional exposure to riskier segments of the fixed income universe, such as high yield at a 39% increase and EM debt at 38%.

With many investors still carrying elevated levels of cash, Shafer understands the desire for gatekeepers to boost fixed income holdings.

“Cash rates may still be high in many places around the world, but the certainty around expected cash returns logically declines over time,” Shafer says. “In contrast, given the long durations and longer maturities of bonds, fixed income may provide a higher degree of confidence for a targeted level of return. In fact, cash may be the riskier option over the long term, particularly as many central banks have already begun to cut rates.”

EXPECTED VOLATILITY CLOUDS EQUITY OPTIMISM

There is less gatekeeper consensus regarding equity returns, with a net 10% of respondents anticipating increased rather than decreased returns for both public equity and private equity. Most fund selectors expect the investment environment over the next 12 months to feature increased equity volatility and heightened geopolitical risk — particularly with the recent elections in the UK and France. The US presidential race in November 2024 will add to the secular forces already impacting the investment environment.

Global equities are the top targets globally for increased allocations, followed by thematic equities — while an element of home bias can be seen for both gatekeepers in Europe and Asia. As large-cap equities have been in the ascendancy for some time, 64% of global gatekeepers are now confident of a small- and mid-cap performance revival over the next 12 months, while 58% expect growth to outperform value over the same period.

Shafer adds: “Even though rate cuts would provide a tailwind for equity markets, fundamentals are the true driver of long-term equity performance. The macro backdrop has dominated the investment narrative for some time, but we expect fundamentals to come back into focus, and companies must demonstrate durable earnings growth and robust demand to perform well from here. This aligns with the corporate profit outlook, where growth stocks are expected to generate stronger earnings growth relative to value-oriented peers, which rely more heavily on the business cycle.”

As for the themes at the forefront of thinking for gatekeepers, the rise of AI is naturally high on the agenda, with almost half citing it as a high priority. Within the real estate space, data centres are intrinsically linked to massive demand growth of data stemming from the proliferation of AI. This structural growth opportunity has led 47% of global gatekeepers to indicate a willingness to increase allocations in data centres.

For the full findings of PGIM Investments’ Gatekeeper Pulse report, visit the webpage.

For illustrative purposes only; sets forth our views as of this date. The underlying assumptions and our views are subject to change. Past performance is not a guarantee or a reliable indicator of future results. Future results are not guaranteed and may be unpredictable particularly in times of market volatility. Loss of principal may occur.

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