Skip to main content
PGIM Quantitative Solutions LogoPGIM Quantitative Solutions Logo
  • About Us
    • Our Philosophy
    • Our History
    • The Team
    • Diversity, Equity & Inclusion
    • Contact Us
  • All Insights
    • ESG
    • Market Views
  • ESG Overview
    • ESG Insights
    • ESG Policy
    • Stewardship and Governance
  • Overview of Solutions
    • Quantitative Equity
    • Multi Asset
    • PGIM Wadhwani
    • PGIM DC Solutions
  • Client Log In
  • Careers
Global Multi-Asset Solutions Brochure card
Market Views

2022 Q2 Capital Market Assumptions2022Q2CapitalMarketAssumptions

By Marco Aiolfi & Lorne Johnson — May 31, 2022

10 mins

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
Read More

Share

Summary

Q1 2022 Developments Informing Our Long-Term (10-Year) Forecasts: The most recent estimates of US GDP showed annualized growth jumped to 6.9% in the final quarter of 2021 on the back of a strong buildup in business inventories. GDP growth was also helped by consumption, which grew at a solid pace, but at a fraction of the strong growth seen earlier in the year. Concerns about multi-decade- high levels of inflation in developed economies continued to grow. Already in a strong uptrend, commodity prices experienced sharp spikes as Russia’s invasion of Ukraine led to supply shocks, further intensifying inflationary pressures. Headline and core US inflation readings, which exclude more volatile elements such as energy, advanced to new multi-decade highs. This prompted global central banks to accelerate plans for tightening monetary policies. Both short- and long-term rates rose quickly in anticipation of faster hiking cycles, while inflation expectations moved only moderately higher for longer-term outlooks. The speed of short-term rate increases caused a temporary inversion in the 10Y – 2Y Treasury yield spread, often a harbinger of slower economic growth. Global equity markets declined in the first quarter, with US equities falling over 12% for the quarter through early March before recovering somewhat to close the quarter down 5.2%. As a result of the supply shock coincident with Russia’s invasion of Ukraine, the Bloomberg Commodity Index advanced by 25.5% in the first quarter, the strongest such quarterly reading since the third quarter of 1990, amid the Iraqi invasion of Kuwait. Our near-term developed and emerging market economic growth and inflation forecasts are similar to those from the previous quarter. Evolving policy rates and a moderation in forecast economic growth and inflation have important implications for our long-term asset class forecasts.

Long-Term Global Economic Outlook: We expect real economic growth in developed economies to continue to moderate over the next decade, as it has for the last 30 years. This is due to the limited growth of the developed labor force, which is constrained by domestic demographics. An assumption of no significant offset from improved productivity growth is an additional constraint on growth. Inflation in developed markets, in contrast, is anticipated to moderate over the next 10 years, relative to the elevated rates of inflation observed in 2021 and early 2022. Nevertheless, inflation is expected to be somewhat higher than that observed in the period following the Global Financial Crisis of 2008, and prior to the COVID-19 induced recession of 2020. We expect long-run real economic growth and inflation in emerging markets to advance at higher annualized rates. Younger populations and higher rates of return on capital in emerging markets are driving higher rates of nominal economic output compared to developed markets. While our baseline long-term inflation expectations assume a reversion to longer-term trends, the nearer term outlook for inflation is highly uncertain. The four-decade trend in falling US inflation has at least temporarily paused with US inflation rising to 7.0% in 2021, and potentially remaining elevated over the next several quarters. While an extreme scenario of 1970s-style, double-digit inflation appears unlikely, the potential for a sustained period of average inflation well above central bank targets is a non-trivial risk for investors. We cover these issues at length in two related white papers - Is Inflation About to Revive? and Portfolio Implications of a Higher US Inflation Regime.

Equities: Our 10-year annualized nominal forecast return for global equities is 6.0%, a modest increase from our forecast of 5.7% in the first quarter of 2022. The forecast increase is primarily attributable to somewhat more favorable valuations following a decline in global equities of 5.3% in the first quarter. Our long-term return forecast for US equities is somewhat lower, at 5.3%. Returns for developed market equities outside the US are forecast at 7.0%, with the differential relative to the US largely accounted for by lower historical valuation ratios. Our long-run forecast for emerging market equities is 7.9%, with higher rates of nominal economic growth offset somewhat by comparably lower expected income returns than in developed markets and a negative expected valuation adjustment.

Read More

10-Year Forecast Returns and Volatility

Source: PGIM Quantitative Solutions as of Mar 31, 2022. Forecasts are not a reliable indicator of future performance.

Fixed Income: Global sovereign interest rates rose markedly in the first quarter of 2022 as inflationary pressures prompted a ratcheting up in expectations for global central bank interest rate hikes. Our long-run forecast for hedged global aggregate bonds is 2.6%, a doubling in our forecast of 1.3% from the first quarter of this year. Our long-run forecast for US aggregate bonds is 3.7%, consistent with higher initial yields in the US. At the end of our 10-year forecast horizon, we expect the US Federal Reserve’s (Fed) policy rate to be approximately 1.4%, about 100 basis points higher than the midpoint of the policy rate target range at the end of the first quarter. Outside the US, developed market central banks are forecast to also increase policy rates from even lower negative levels in many cases, as longer-run policy normalization is expected. In US credit markets, we are forecasting average spread levels to keep broadly in line with current spread levels over the next 10 years, following a modest rise in the first quarter, informing expected returns of 4.2% and 5.0% for US investment grade (IG) and high yield bonds, respectively.

Real Assets: Real assets are broadly defined to include asset classes that have physical properties or have returns that are highly correlated with inflation. We include commodities, REITs and TIPS as real assets in our Capital Market Assumptions (CMAs). Our forecasts for all these asset classes are forecast to outperform our 10-year US inflation forecast of 2.3%.

Private Assets: Given the increasingly important role private asset classes play in a growing number of institutional allocations, beginning in the fourth quarter of 2021 PGIM Quantitative Solutions introduced forecasts for US buyout private equity, US venture capital private equity and US mezzanine private debt. Our methodology for forecasting these private assets ties the forecast outcomes of private assets to those of public market assets and assigns a premium consistent with historical empirical outcomes, acknowledging the underlying illiquidity and potential leverage employed in these asset classes relative to public market counterparts. Beginning in the first quarter of 2022, we as well introduced forecasts for core and opportunistic US Private Real Estate based on inputs from the NCREIF property indices and linkages to forecast economic growth and inflation.

Currency and Currency Hedging Returns: Over the next 10 years, we are forecasting mixed returns for the US dollar relative to developed market peers, with outcomes ranging from annualized loss of 0.3% for the British pound to a gain of 1.3% for the Japanese yen. Forecast outcomes for emerging market currencies range from an expected loss of 2.3% for the South African rand to a gain of 0.7% for the Taiwan dollar. Long-term currency hedging returns against a market weighted basket of developed market exposures are forecast to be net positives for US investors as short-term interest rates are anticipated to be higher over the long term in the US relative to the Eurozone and Japan.

60/40 Portfolio Return*: Based on our long-term forecasts, a balanced portfolio of 60% Global Equities unhedged and 40% Global Aggregate Bonds hedged is forecast to return 5.1% annually over the next 10 years. This forecast represents an increase of 0.7% from the first quarter, attributable primarily to the rise in global interest rates to date in 2022.

 

* For illustrative purposes only. All model portfolios have significant inherent shortcomings and do not consider many real-world frictions. There is no current PGIM Quantitative Solutions client portfolio with this composition of assets. It does not constitute investment advice and should not be used as the basis for any investment decision.

 

  • By Marco AiolfiCo-Head of Multi Asset, PGIM Quantitative Solutions
  • By Lorne JohnsonHead of Multi-Asset Portfolio Design, PGIM Quantitative Solutions

Related

Introducing 2022 Q2 Capital Market Assumptions
Market Views

Introducing 2022 Q2 Capital Market Assumptions

By Lorne Johnson — Jun 17, 2022

Lorne Johnson discusses how income, growth and valuation inform our Capital Market Assumptions.

Market Views

Market Views

Learn more about PGIM Quantitative Solutions' Capital Market Assumptions, Outlook & Review and timely views on market.

  • About Us

    • Overview
    • Our Philosophy
    • Our History
    • The Team
    • Inclusion & Diversity
    • Contact Us
    • Careers
  • Insights

    • Overview
    • ESG
    • Market Views
  • ESG

    • Overview
    • Insights
    • ESG Policy
    • Stewardship and Governance
  • Solutions

    • Overview
    • Quantitative Equity
    • Multi Asset
    • PGIM Wadhwani
    • PGIM DC Solutions
PGIM Quantitative Solutions Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • Cookie Preference Center

For Professional Investors only. All investments involve risk, including the possible loss of capital.

The content and materials presented here are for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM Quantitative Solutions LLC (PGIM Quantitative Solutions or PGIM Quant), formerly known as QMA LLC, is an SEC-registered investment adviser and a wholly-owned subsidiary of PGIM, Inc. (PGIM), the principal asset management business of Prudential Financial, Inc. (PFI) of the United States of America. Registration with the SEC does not imply a certain level of skill or training. PFI of the United States is not affiliated in any manner with Prudential plc incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. 

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA Amsterdam, The Netherlands. PGIM Netherlands B.V. is authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. 

These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II). PGIM Quantitative Solutions, PGIM Limited and/or PGIM Netherlands B.V. are indirect, wholly-owned subsidiaries of PGIM. These materials are not intended for distribution to, or use by, any person in any jurisdiction where such distribution would be contrary to local or international law or regulation.

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM Quantitative Solutions, which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.

PGIM, PGIM Quantitative Solutions logo and the Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

© 2023 PGIM Quantitative Solutions. All Rights Reserved.
 

You are viewing this page in preview mode.

Edit Page