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1、LOOKING BEYOND THE UNCERTAINTYFor professional investors only.All investments involve risk,including possible loss of capital.2023 BEST IDEAS1 2023 BEST IDEAS|PGIMINTRODUCTIONPage 2 Jennison AssociatesTWO SHADES OF GROWTH FOR AN UNCERTAIN MARKETPage 3PGIM Fixed IncomeOPPORTUNITIES IN EUROPEAN INVEST
2、MENT-GRADE DEBTPage 6PGIM Private CapitalDIRECT LENDING AND THE SHIFT TO NON-SPONSORED DEAL FLOWPage 8PGIM Real EstateDATA CENTER DEMAND GROWTH LIKELY A LONG-TERM STORYPage 10PGIM Quantitative SolutionsMACRO UNCERTAINTY CALLS FOR AGILITY&DIVERSIFICATIONPage 13Montana Capital PartnersPROVIDING LIQUID
3、ITY IN AN ILLIQUID MARKETPage 15PGIM DC SolutionsFLEXIBLE SPENDING AND OPTIMAL RETIREMENT PORTFOLIOSPage 17CONTENTSPGIM|2023 BEST IDEAS 2 INTRODUCTIONAfter not one,not two,but three consecutive tumultuous years for financial markets,investors might be ready for a break from volatility in 2023.Theyre
4、 not likely to get it.Over the past three years,markets have essentially plowed through three different cycles:in 2020 it was the COVID-driven selloff,in 2021 the markets recovery supported by dramatic fiscal and monetary stimulus,and last year brought on the aftermath of all of that,ushering in hig
5、her inflation and escalating interest rates.And just beneath those macro surfaces lies a host of other hurdles:the war in Ukraine,the crypto implosion,Chinas ongoing battle to contain COVID-19,unresolved supply chain issues,and,of course,whether the US and other major economies enter a recession thi
6、s year.For investors who have seen pretty much everything over this three-year span,its hard to imagine yet another major,unforeseen shock to the system.Whats more likely this year is simply old-fashioned uncertainty brought on by the economic environment and the Federal Reserves decision-making pro
7、cess.Ongoing monetary tightening by central banks and persistently high inflation have increased the odds of a global recession,and major central banks are unlikely to pivot until there are very clear signs that inflation is sustainably slowing towards their targets.The alternate view is that the cu
8、rrent economic backdrop remains solid enough for the Fed to tighten conditions without pushing the economy into recession as inflation eases in the next two years.The US is heading into 2023 on a firmer economic footing than Europe,thanks in large part to the still-strong labor market.It nevertheles
9、s has to contend not only with the ongoing monetary tightening and elevated inflation,but also negative wealth effects and a correcting real estate sector.Given these complex layers of challenges,its never been more important for investors to take a long-term view of their portfolios.Its impossible
10、to reliably time markets in any economic environment,but volatility can unlock opportunities by creating attractive entry points at reasonable prices.And its precisely in that kind of environment where global,nimble active management can distinguish itself.At PGIM,our focus has always been on the lo
11、ng-term trends that can help lead to unique and untapped investment opportunities for our clients.The investment ideas offered in our fourth annual Best Ideas report reflect the global footprint of our businesses,the deep asset-class specialization of our boutiques,and the informed convictions of ou
12、r portfolio managers who partner with investors every day around the world.While no such investment ideas can serve as a panacea for the uncertainty that is sure to befuddle financial markets in 2023,ever-changing markets remain an ocean of vast possibilities.PGIMs Best Ideas highlight a host of are
13、as where we believe investors will find promising opportunities.3 2023 BEST IDEAS|PGIMTWO SHADES OF GROWTH FOR AN UNCERTAIN MARKET Todays markets are among the most challenging we have seen in several decades,and the lack of visibility,contradictory indicators,and macroeconomic pressures have invest
14、ors on edge.Global equities declined into a bear market in 2022,with growth stocks among the worst performers.In the coming year,we believe the Federal Reserve will ease,and potentially end,its tightening cycle as the economy slows,and in this environment,we believe companies with reliable growth an
15、d exposure to secular themes have a long-term advantage.Recognizing the key differences among these growth companies is helpful to better understand their behavior in different market cycles.In our experience,they can be divided into two broad groups,which we call emerging growers and stable growth
16、compounders.Both groups have compelling long-term return potential,but they also have distinct risk and return profiles.Emerging growers are young disruptors,in a new or developing industry,and offer significant upside potential.They reinvest their cash flow into sales,marketing,research,product dev
17、elopment,and achieving scale,while reporting relatively lowor noprofits.Stable growth compounders,on the other hand,also offer upside potential,but they have a history of profitability and established drivers of growth.They are often former emerging growers that have matured into large companies.The
18、y can maintain their competitive position through continued innovation and expansion into new markets or by leveraging an established business that cannot be easily replicated by competitors.Emerging Growers Generally Have More Growth Potential Than Stable Growth CompoundersFor illustrative purposes
19、 only.Source:JennisonEarly stage growth companies often report losses in their early years().Over time,the strongest of these companies generate positive and growing earnings().For active managers,identifying promising early stage growth companies before the market is a significant potential source
20、of returns.PositiveRevenue GrowthEarnings GrowthNegative0Stable Growth CompoundersEmerging GrowersEarly Stage Growth CompaniesPGIM|2023 BEST IDEAS 4 Both emerging growers and stable growth compounders have outperformed the MSCI ACWI for most of the past two decades.*The groups performance,however,ha
21、s diverged at several points,especially over the last few years.Both benefited from the surge in technology adoption during pandemic-related shutdowns,but emerging growers were much more exposed to the Feds tightening cycle and rising interest rates.The selloff has lowered valuations for growth comp
22、anies,offering potential opportunities because many of them continue to deliver steady growth.Finding these opportunities is extremely difficult.Most companies fail to live up to consensus growth expectations;in fact,consensus earnings growth forecasts have typically been either too optimistic or to
23、o pessimistic.Skilled and experienced investors with a bottom-up fundamental approach,however,can improve forecasting,which can add significantly to long-term returns.Another potential boost to performance comes from secular growth themes,which can provide significant tailwinds to well-managed compa
24、nies.Over the next several years,we see several potential themes in areas such as emerging markets fintech,electric vehicles,luxury,and healthcare.Businesses,organizations,and individuals throughout emerging markets are seeking more convenient and affordable financial services,offering a significant
25、 fintech Emerging Growers and Stable Growth Compounders Have Outpaced The Index Since 2005 Its Difficult to Identify Top Performers in AdvanceData from June 30,2005,through September 30,2022.Calculated quarterly.Past performance does not guarantee future results.Source:FactSet,Jennison*We calculated
26、 each groups performance compared to the MSCI ACWI from June 2005 through September 2022.For this analysis,we used company data going to back to 2005,the first year in our view with enough data to ensure thorough and meaningful analysis.In addition,we sought 17 years of data(versus a more standardiz
27、ed 15-year period)to have enough context to account for the Global Financial Crisis in 20082009.Data based on rolling 5-year returns for periods from 12/31/92 to 12/31/21.Average median annualized returns of stocks over rolling five-year periods,ranked by 5-year historical earnings growth quintiles(
28、1=highest,5=lowest).Quintiles are rebalanced quarterly.Past performance does not guarantee future results.Source:Jennison,FactSet.Consensus earnings estimates of MSCI ACWI companies in the top quintiles of earnings growth(1 and 2)compared to realized earnings growth five years later.Companies that r
29、emained in the quintiles after five years were“hits;”those that dropped out were“misses.”Index,June 30,2005=00400500600700Jun 2005Mar 2006Dec 2006Sep 2007Jun 2008Mar 2009Dec 2009Sep 2010Jun 2011Mar 2012Dec 2012Sep 2013Jun 2014Mar 2015Dec 2015Sep 2016Jun 2017Mar 2018Dec 2018Sep 2019Jun 202
30、0Mar 2021Dec 2021Sep 2022 Economic/Market EventsStable Growth CompoundersEmerging GrowersMSCI All Country WorldGlobal Financial CrisisUS Debt DowngradeFlash CrashMarket CorrectionCOVID-19 OutbreakTightening Cycle BeginsData from June 30,2005 through September 30,2022.Calculated quarterly.Past perfor
31、mance does not guarantee future results.Source:FactSet,Jennison Exhibit 5:Stable Growth Compounder versus Emerging Grower Performance in Periods of High VolatilityEventDate(s)Return Differential(%)*Global Financial Crisis(GFC)October 2007March 20099.58*US Debt DowngradeAugust 2011-5.152015 Flash Cra
32、shAugust 20151.262018 Market CorrectionDecember 20188.89COVID-19 OutbreakFebruaryMarch 2020-8.52Tightening Cycle BeginsJanuary 2022present14.45*Stable growth compounders less emerging growers.*Annualized returns for GFC;all other returns are cumulative.Data as of September 30,2022.Past performance d
33、oes not guarantee future results.Source:FactSet,JennisonIn our view,these patterns of performance tie back to the fact that markets are discounting mechanisms that reward visibility.To generate excess market returns,we believe growth investors must be earlier and more accurate than the market in ide
34、ntifying companies with a clear path to profitability and inflection points in the growth rates of their revenue and earnings.Earnings growth has been a potent driver of returns,and we will examine this concept and the opportunity and challenges inherent in picking winning growth stocks.Returns Have
35、 Tracked Earnings GrowthOver the past several decades,the companies with the fastest earnings growth have outperformed through a range of market environments(Exhibit 9).We mapped each company in the emerging growersand stable growth compounders proxy portfolios tothe corresponding performance quinti
36、le,to test ourhypothesis that they should be concentrated in the firsttwo quintiles of returns.The results were in line withour expectations.The vast majority of emerging growerswere concentrated in the top quintile of returns,whichis an intuitive result as these companies are in thehighest ranks of
37、 5-year earnings growth.Stable growthcompounders tended to cluster in the second quintile of returns,with some falling into the third quintile.This is also consistent with the levels of earnings growth generated by these companies.While long-term data shows that the top earnings growers lead perform
38、ance,this trend reversed in the 12 months through September 30,2022.Investors,facing the uncertainty of a step change in inflation and interest rates,sold the high growers ostensibly for the perceived safety of shorter-duration growth stocks.Successful Growth Investing Is an Active ChallengePutting
39、aside the reversal in returns over the past 12 months,Exhibit 9 might suggest a strategy for successful long-term growth investing:simply construct a portfolio of stocks from quintiles 1 and 2.It should come as little surprise,however,that the reality is far more complex.Identifying in advance the c
40、ompanies that will deliver high and sustainable growth is extremely difficult.As a case in point,the vast majority of companies fail to live up to consensus growth expectations(Exhibit 10).Exhibit 9:The Fastest Growers Have Outperformed over the Long Term MSCI All Country World Index Performance by
41、Historical 5-Year Earnings Growth Quintile(%)-2024681012141618Quintile 1Quintile 2Quintile 3Quintile 4Quintile 5Data based on rolling 5-year returns for periods from 12/31/92 to 12/31/21.Source:Jennison,FactSet.Average median annualized returns of stocks over rolling five-year periods,ranked by 5-ye
42、ar historical earnings growth quintiles(1=highest,5=lowest).Quintiles are rebalanced quarterly.Past performancedoes not guarantee future results.Exhibit 10:Its Very Difficult to Identify Top Performers in AdvanceConsensus earnings estimates of companies in quintiles1 and 2 compared to realized earni
43、ngs growth five yearslater.Companies that remained in the quintiles after fiveyears were“hits;”those that dropped out were“misses.”21.6%78.4%Hit RateMiss Rate84.3%16.7%Quintile 1 Consensus Analyst Hit/Miss RateQuintile 2 Consensus Analyst Hit/Miss Rate5 2023 BEST IDEAS|PGIMopportunity in emerging ma
44、rkets.China was a powerful example of this trend,and we believe the potential for cashless payments,credit expansion,and digital banking services is enormous in other Asian and Latin American emerging markets.Investors,however,should be aware of idiosyncratic risks,including each countrys regulatory
45、 environment.Sudden,unexpected changes to regulations can negate long-term company plans,undermine competitive advantages,and make it virtually impossible for investors to model earnings and revenue growth.After decades of development and promise,electric vehicles have captured the public imaginatio
46、n,forced strategic pivots from global auto companies,and laid the foundation for a full self-driving future.We believe the leading electric-vehicle players will redefine the relationship between carmakers and consumers,transforming the auto industry.The opportunity is also not limited to vehiclesthe
47、 disruption includes batteries,the battery supply chain,and alternative sources of electricity generation.In the luxury segment,many top brands have seen strong demand despite rising economic uncertainty.They continue to benefit from their positioning with consumers and the power of their operationa
48、l and financial models.Moreover,demand for luxury goods has diversified.Todays luxury consumers are youngermillennials and Gen Z account for a majority of purchasesand more American men have come to appreciate luxury and the top brands,which has helped drive growth.In healthcare,companies are improv
49、ing their ability to diagnose,monitor,and treat diseases with personalized therapeutics.We believe the current wave of innovationespecially for select companies with access to patient datais on a trajectory similar to that seen in the information technology sector from 2010 to 2020.The markets in 20
50、23 will likely remain highly uncertain,but we maintain a long-term perspective.Growth companies that offer differentiated products and services that create real value for society will continue to prosper.We believe investors who understand the differences among growth companies,rely on bottom-up,fun
51、damental investment approaches,and have exposure to secular growth themes are more likely to find opportunities.This is challenging,but history demonstrates that it is achievable and,above all,rewarding.Growth companies that offer differentiated products and services that create real value for socie
52、ty will continue to prosper.PGIM|2023 BEST IDEAS 6 OPPORTUNITIES IN EUROPEAN INVESTMENT-GRADE DEBTThe repricing of financial markets in 2022 led to short-term pain for fixed-income investors.However,with most of the selloff now potentially in the rear-view mirror,a reallocation back into bond market
53、s is approaching as rates begin to peak.European investment-grade credit spreads in particular are starting to look attractive in the medium term,as new opportunities emerge from recent volatility and the sectors increased credit dispersion.The European IG market,like the broader credit market,is su
54、rrounded by uncertainty after a volatile year.Heightened geopolitical risks remain in place,as does persistent inflation.Europe continues to grapple with energy shocks that have limited progress in reducing supply-chain disruptions,creating stickier inflation.Slowing growth around the globe is thus
55、forecast to be more pronounced in Europe.Stagflation appears to be the most likely scenario,with risks currently skewed toward weak growth coupled with elevated inflation.This raises the odds that rates will be higher for longer.Yet spreads already reflect much of the perceived downside risk,and Eur
56、opean corporates are showing signs of underlying strength.During previous market cycles,spreads have not spent much time at levels similar to todays before mean reverting and tightening.The European markets underperformance versus the US has left spreads in the former generally trading at more attra
57、ctive levels.As volatility persists,the relative-value opportunities among European corporates are broadening.Credit fundamentals are starting from a position of strength,giving European corporates some breathing room should inflation continue to rise and squeeze margins.Profit margins have widened,
58、share buybacks remain subdued,and leverage ratios are recovering as EBITDA growth improves on a year-over-year basis,underpinned by the lifting of COVID-19 lockdowns in Europe.Looking at the global macroeconomic landscape,Chinas decision to scale back its lockdowns could offer a boost to European tr
59、ade and the regions industrial sector.Final data for 2022 will likely show that full-year growth was solid,reflecting base effects and strong momentum in the first half of the year as economies reopened.As volatility persists,the relative-value opportunities among European corporates are broadening.
60、7 2023 BEST IDEAS|PGIMThe outlook for 2023 is murkier,as global growth weakens and the ongoing Russia-Ukraine war contributes to higher commodity prices.As a result of Russias invasion and its impact on manufacturing supply,the eurozone finds itself in a much tougher position than the US.Goods infla
61、tion in Europe is unlikely to cool and revert to more normal levels as soon as in the US,taking into consideration the state of supply chains in Europe and the impact of the energy crisis on the factory sector.Unemployment rates are historically very low but are forecast to worsen as the economy wea
62、kens.Then theres the European Central Bank.The central banks posture proved to be more hawkish than investors were anticipating in December,even as officials raised interest rates by an expected 50 basis points.ECB President Christine Lagarde sent a clear message to the market that more policy tight
63、ening is coming,including additional rate increases,despite the property sector already sending distress signals.Echoing messages from the Federal Reserve,the ECB has signaled that rates will ultimately need to rise to a higher level than investors had expected and remain restrictive for some time t
64、o bring inflation under control.Investors should prepare for volatility as the winter gas crisis and the timing of the ECBs rate moves come into focus.The war in Ukraine,the energy crunch and the potential for new shocks mean that macro risks will remain elevated.While investors no doubt face a tepi
65、d growth outlook in 2023 with earnings growth stalling,this environment is supportive of credit.We are nearing multi-generational highs in inflation and yields.Wherever rates peak,it will likely set the high-water mark for yearsperhaps decadesto come.Globally,IG yields have already reached levels no
66、t seen in more than a decade.While spreads for European high-yield debt and US corporates are still vulnerable in the short term,European corporate spreads have widened materially from tightened pre-pandemic levels,notably for IG.Spreads in European IG have recently moved closer to the wider levels
67、seen early in the pandemic,a trend that emerged as spreads rallied in the fourth quarter of 2022,outperforming US IG.Examining individual credits within the European IG sector,increased credit dispersion enhances the set of single-name alpha opportunities.We prefer financials,particularly banking,to
68、 compress into corporates,and utilities over lower beta industrials.We also see value in corporate hybrids,as well as select strong BBBs and non-CSPP eligible paper.Rating and Maturity Adjusted OAS Investment-Grade IndexEUR IG Credit Spreads Not Far From the COVID-19 Wides:Euro OAS Financials vs.Non
69、-FinancialsAs of September 30,2022.Source:ICE BofAML,PGIM Fixed Income and ICE Data Indices,LLC,used with permission.An investment cannot be made directly in an index.As of September 30,2022.Source:Bloomberg.Past performance is not a guarantee or a reliable indicator of future results.You cannot inv
70、est directly in an index.PGIM FIXED INCOME1Market Outlook-Short Term-Pain vs Long-Term GainbpsAs of September 30,2022.Source:ICE BofAML,PGIM Fixed Income and ICE Data Indices,LLC,used with permission.An investment cannot be made directly in an index.Current:221bpsAverage:112 bps0500300350
71、4004500200220032005200720082000202022Corporate IndexAvgAvg+1 Std.Avg-1 Std.208 bps244 bps181 bps600310Jun-15Oct-15Mar-16Jul-16Nov-16Apr-17Aug-17Dec-17May-18Sep-18Jan-19Jun-19Oct-19Feb-20Jul-20Nov-20Mar-21Aug-21Dec-21Apr-22Sep-22Barc EuroAgg CorpBarc EuroAg
72、g Corp FinancialsBarc EuroAgg Corp Non-finsGreece Perceived Default RiskSoarsECB QE AnnouncedbpsU.S.Election ResultsImpact of BrexitFears Over Global GrowthECB Announces CSPPECB TLTRO AnnouncementEurobond Market IndigestionConcerns on Fed,Rates&GrowthECB Announces Proposed End to CSPPCoronavirus con
73、cernsbpsPGIM|2023 BEST IDEAS 8 DIRECT LENDING AND THE SHIFT TO NON-SPONSORED DEAL FLOW Traditional models of how companies raise capital have been substantially disrupted in recent years.The impact of the global financial crisis and the advent of enhanced rules and regulatory requirements lessened b
74、anks ability(and willingness)to issue loans to small and mid-size companies,and the result has been a rapid ascent of direct lending.Middle-market companies typically dont have access to the same depth of capital market solutions as do larger companies,and the GFC helped change the face of leveraged
75、 mid-market lending from one driven largely by banks to one that is now dominated by non-bank,institutional lenders.Those lenders have a longer-term,more asset-driven approach to underwriting risk,so the relative market share for direct lending and non-bank investors will likely increase over time,p
76、articularly if the economy continues to slow.While many smaller companies have not yet utilized direct lending,when they do its usually for a handful of purposes,including growth,recapitalizations,acquisitions,sponsored leveraged buyouts,and non-sponsored management buyouts.“Sponsored”can be a finan
77、cial investor,commonly a private equity fund,while“non-sponsored”may be a family owner or management team.Typically,the agenda of the company,the strategy,the timeline to achieve that strategy,and the financial leverage to help achieve it are driven by the ownership.Sponsored private equity funds ha
78、ve a more finite horizon with a return over a three-to five-year period,so financial leverage is important to generating return expectations over that period.Non-sponsored-owned companies,on the other hand,typically have a more permanent or longer-term horizon.“Where I see a lot of opportunity is in
79、 the non-sponsored world,because as we head into a potential recessionor at least an economic slowdownif the banks start getting tighter again you can find good opportunities calling on companies directly,”said Dianna Carr-Coletta,Managing Director and Partner in PGIM Private Capitals Alternatives D
80、irect Lending Group.Of the hundreds of thousands of mid-market firms in the US and Europe,only a small portion are involved with private equity firms.The non-sponsored side makes up most of the 9 2023 BEST IDEAS|PGIMrest.While these smaller firms do potentially present some company and credit risks,
81、direct lenders in this segment are able to be selective about the companies they lend to,and having an enduring track record with these businesses allows lenders to identify and mitigate those risks.“The lower middle-market companies that arent sponsor-owned have not accessed the direct-lending mark
82、et to the same extent PE-sponsored firms have,”Carr-Coletta said.“There are tons of these companies out there,and while most are being serviced by their banks,some may need to take on a capital project and lever up a bit more.For a firm like ours that has been talking to them for years through our r
83、egional office network,we may be able to help them and provide the capital their banks may no longer be able to provide.”Direct lenders with a willingness to build relationships with owners,understand their business strategy and carry out bespoke underwritingwith specialized covenants and custom ter
84、mscan create attractive debt solutions.Experienced teams with strong track records through multiple credit cycles can deliver more consistent investment performance.Thats even more true should the economy experience the slowdown many are expecting.For borrowers who have seen their floating-rate inte
85、rest rates move from the mid-7%range to above 10%particularly those who may not have had a financial cushion to begin withthere will be pressure.The investment philosophy of PGIM Private Capital,established nearly 100 years ago,is straightforward:it views its business through a long-term lens,levera
86、ging its scale,relationships and experience while providing a consistent investment process.“We tend to do well when there is a bit of disruption in the markets because weve been very consistent in our underwriting strategy and how much we will push when it comes to leverage,”Carr-Coletta said.“Ther
87、e are others in the market that dont do that.And given the relationships we have with these companies,if they are going through a rough patch,were at the table with them,working through the issues.That happened in 2008-2009,when companies couldnt find liquidity and we were there for them,and we may
88、experience a similar environment if we enter a significant downturn in 2023.”As we head into a potential recessionor at least an economic slowdownif the banks start getting tighter again you can find good opportunities calling on companies directly.Dianna Carr-Coletta,Managing Director,PGIM Private
89、Capitals Alternatives Direct Lending GroupPGIM|2023 BEST IDEAS 10 DATA CENTER DEMAND GROWTH LIKELY A LONG-TERM STORYData center demand has grown significantly in recent years,underpinned by a host of factors.When it comes to real estate,the information,communication and technology(ICT)sector is the
90、underlying driver of demand for data centersbuildings designed specifically to house computer systems and network equipment to support digital information processing.Based on current structural trends and the latest available data,this sector will continue to grow significantly in the coming years.D
91、emand for data globally is likely only going to grow,and as we create more data,well need more processing power to meet this demand.To do this cost efficiently and in a more environmentally friendly manner,development of more modern hyperscale data center capacity is inevitable.And strong tenant dem
92、and forecasts for data centers comes from the vital role they play in a technology-driven world,and as such they are firmly entrenched as an integral part of corporate IT architecture.In particular,as more businesses embrace the public cloud to streamline this architecture and improve efficiency and
93、 security,they have gradually been migrating or integrating their IT infrastructures to incorporate the public cloud.As a result,the public cloud services market is forecast to grow globally by approximately 20%to reach almost$600 billion in 2023,and cloud data centers are expected to remain the mai
94、n growth driver in data center IP traffic.This demand for cloud data center capacity will be further increased by various underlying drivers as upstream IT demand broadens across industries,particularly among native technology companies.Despite the sharp declines in share prices of technology compan
95、ies in recent months amid falling stock markets,many of these driversincluding e-commerce,artificial intelligence,and the metaverseareexpected to remain in place,driven by long-term needs.One consequence of this growth in demand is the rise in the need for hyperscale data centersgenerally,very large
96、 power capacity facilities catering primarily to the cloud service providers(ex.Google,Microsoft,AWS,Alibaba,Oracle,etc.).The number of facilities tracked by Synergy Research has grown at an average rate of 12%per year since 2018 and is expected to hit 1,000 globally by the end of 2024.The growth in
97、 hyperscale data centers also aligns well with PGIMs environmental,social and governance(ESG)stance.Hyperscale tenants and operators have voiced a strong commitment to a zero-carbon footprint and using renewable energy in the facilities in which they operate.11 2023 BEST IDEAS|PGIMCarbon emission in
98、 data processing is driven by the number of servers running and the total energy required to power and cool the servers.Customers would use fewer servers and less power by using cloud computing instead of operating their own enterprise solutions,so a shift from enterprise to cloud dramatically reduc
99、es carbon emissions.Data centers will have a crucial role to play in the most optimal utilization of resources and what is the most energy efficient way to meet future digital demands.A Growing Global NeedStrong structural demand has been met with significant investment activity in the sector,in tur
100、n rapidly driving new supply.Data center supply rose 20%per year between 2016 and 2021,led by the APAC region,which saw supply grow 30%per year over the same period.Growth was particularly strong during 2018 and 2019,when development rose sharply as the region played catch-up to the more mature US m
101、arket.Looking ahead,global supply growth is expected to moderate to 13%per year over the next three years.The supply pipeline in APAC is also expected to moderate,though certain markets such as Sydney and Tokyo will remain focal points of capacity growth.Growth in Europe is expected to remain relati
102、vely stable at 15%per year.Recent development trends have seen strong activity in secondary markets outside the traditional four to five major data center markets in each region.These tend to be high population density markets,with less-developed data center infrastructure but better land and power
103、availability,where cloud operators set up facilities to complement those in major metros nearby.The global data center sector enjoyed a record year in 2021,with an average return of 15%,driven mainly by yield compression.This was in line with our expectations of tightening yields as risk premiums be
104、tween data centers and other traditional commercial real estate sectors declined.Going forward,the returns outlook across the three major markets(US,Europe and APAC)tells a similar story a softer near-term outlook to yields as the economic environment weakens before recovering ahead of expected impr
105、oving economic fundamentals in 2024.The similarities across the regions speak to the globally shared critical need for digital infrastructure.Globally,Estimating the Growth in Demand for Data CentersSources:Oxford Economics,Cisco,Statista,PGIM Real Estate.As of November 2022.!Global Population,Mobil
106、e Subscribers&Internet Users(US$billion)Global Public Cloud Spending(US$billion)Global Data Center IP Traffic(ExaBytes p.a.)00510152025F30FPopulationMobile SubscribersInternet Users00500600700122F23F05,00010,00015,00020,00025,00030,000122F23FTraditionalClo
107、udThe number of hyperscale data centers tracked by Synergy Research has grown at an average rate of 12%per year since 2018 and is expected to hit 1,000 globally by the end of 2024.PGIM|2023 BEST IDEAS 12 as an unweighted average of the three markets,we see returns bouncing back in 2023 off an expect
108、ed pickup in economic and transactions activity,hitting an unlevered return of around 7.5%.In terms of risks with construction costs,including those associated with environmental goals,potentially limiting supply by more than expected,global rental growth is likely to pick up by more than expected,d
109、riving returns higher.Investor surveys tell us alternative real estate sectors,such as data centers,healthcare,cold storage and student living,have gradually become more mainstream.Today,almost a third of all investors are seeking investment exposure to the data center sector,compared to only 5%of i
110、nstitutional investors surveyed in 2018.Key drivers for this have been the attractive returns for new entrants alongside compressed yields in the more established commercial real estate sectors.But demand is also being driven by strong underlying structural needs.As with technology,data centers are“
111、a need to have,”and we expect demand to be resilient amid the current challenging economic conditions.While the sector does face some challenges,it is hard to ignore the sheer speed at which technology and the need for data centers is being adopted.With data centers increasingly becoming critical in
112、frastructure to keep economies working,we see investment returns rebounding in 2023 on a global basisreflecting the global need and demonstrating the sectors resilience to short-term market forces.13 2023 BEST IDEAS|PGIMMACRO UNCERTAINTY CALLS FOR AGILITY&DIVERSIFICATIONGlobal markets took a beating
113、 during most of 2022.Lingering supply chain issues,exacerbated by the war in Ukraine and pandemic-induced shutdowns in China,helped push global inflation significantly higher.As central banks tightened monetary policy in response,fears of recession gripped markets,with stocks,bonds and real estate a
114、ssets declining sharply throughout most of the year.Meanwhile,commodities generally rallied,although returns were somewhat divergent.With central banks around the world enacting restrictive monetary policies to rein in inflation,we have highlighted four macroeconomic scenarios most likely to occur d
115、epending on future moves of the US Federal Reserve:1.A“soft landing”:The Feds forecasts turn out to be broadly correct,with inflation gradually dropping back to target,but without unemployment rising substantially,and with a recession being avoided.2.Persistent inflation&recession:Inflation turns ou
116、t to be more stubborn than expected and the Fed is forced to tighten by more than is priced in and/or keep rates high for longer,thereby eventually precipitating a recession,perhaps in the second half of 2023.3.The Fed tolerates higher inflation:The Fed tightens to bring inflation down from current
117、levels but is unwilling to take risks with respect to a recession or financial stability,and so pauses before it has done enough to bring inflation down back to target.This might postpone a recession into 2024.4.A“hard landing”:The tightening in financial conditions that has already come about leads
118、 to a recession,and perhaps quite quickly(in the first half of 2023),and thus the Fed may end up tightening less than is currently priced in.For much of 2022,investor expectations generally aligned with a greater likelihood of scenario two transpiringi.e.,persistent inflation followed by recessionin
119、 part because the extent of the rise in unemployment projected by the Fed had been associated with past recessions.As other central banks signaled or slowed the pace of rate increases late in the year,investors turned bullish,anticipating that the Fed,too,would move to a less aggressive PGIM|2023 BE
120、ST IDEAS 14 stance.Amid this backdrop,the probability of either a soft landing(scenario one)or the possibility that the Fed might be willing to implicitly accept a higher inflation target(scenario three)increased,and along with it,equity markets partially recovered prior losses.With the ECB and Fed
121、sounding hawkish in December,investors might revisit their bullish stance.Agile Diversification Remains A PriorityWith headline inflation likely to have peaked(or to peak soon)in many countries,and central banks tightening at a slower pace,investor hopes of a“soft landing”in the US are likely to ris
122、e.On the other hand,a slowing global economy is likely to put downward pressure on earnings forecasts.The outlook for equity markets is therefore uncertain.As noted above,there are concerns that central banks might implicitly tolerate a higher rate of inflation,and this could undermine bonds.It is t
123、herefore possible that the traditional 60/40 portfolio mode may continue to fare poorly.An agile global macro strategy can isolate diverse and less correlated sources of returns by factoring in regime shifts and profound changes in sentiment or expectations.The ability to go both long and short in v
124、arious asset classes is an additional advantage,providing flexibility to react nimbly as conditions shift.Global macro delivered strong absolute returns and relative returns versus stocks,bonds and real estate this last year,making it an attractive portfolio diversifier and alternate return source t
125、hrough rising rates and inflation.Traditional investors typically hold bonds as a hedge against their long equities positions.In some ways they stand to get hit twice if markets experience elements of stagflation.Consequently,strategies that hedge against tail risks,such as those that rely on identi
126、fying down trends in equity and fixed income markets and take advantage of these by shorting those assets,have shown themselves able to perform well when both equities and bonds are declining.Liquid alternatives aim to provide uncorrelated sources of return from traditional long-only stock and bond
127、approaches by employing shorting strategies to capitalize on falling prices and casting a wider net through investing in other asset classes.While liquid alternatives are typically a good strategic allocation for investors in any environment,an especially strong tactical case can be made to increase
128、 exposure to liquid alternatives under current conditions.No investor is able to predict exactly when the next episode of sustained equity weakness will occur,so having some allocation to a macro tail-risk strategy can be prudent even in what appears to be“good times.”Tail-risk strategies extract so
129、urces of returns from different underlying asset classes,giving them a diversifying aspect,as well as a hedging feature.We believe its important to have such an allocation as it can change as the world changes,and that flexibility is what enables tail-risk protection at both the point of shock and o
130、n an ongoing basis.Global Macro Outshines Amid Market ChaosSource:Morningstar Direct,PGIM Wadhwani as of 10/31/2022.Global macro represented by Societe Generale Macro Trading Quant Index,bonds represented by Bloomberg Global Aggregate Index,60/40 represented by 60%S&P 500 and 40%Bloomberg U.S.Aggreg
131、ate Bond Index,real estate represented by FTSE EPRA NAREIT Global Index,stocks represented by MSCI All Country World Index.Past performance does not guarantee future results.12%-27%-21%-20%-17%Global MacroReal EstateStocksBonds60/40An especially strong tactical case can be made to increase exposure
132、to liquid alternatives under current conditions.15 2023 BEST IDEAS|PGIMPROVIDING LIQUIDITY IN AN ILLIQUID MARKETAfter years of rising stock markets,a trend even a global pandemic could not break,2022 proved to be much choppier waters for public equity investors to navigate.A combination of rising in
133、flation and interest rates,as well as geopolitical tensions around the globe,led to major corrections:on its worst day of the year,the S&P 500 was down over 25%YTD,while tech-savvy investors had to endure even stronger corrections.At first glance,investors in private equity enjoyed a calmer sea.Due
134、to limited disclosure requirements and lagged reporting,it is difficult to get a full picture.Nevertheless,most data points to small,if any,decreases in private equity portfolios so far.Through September,the Private Capital Quarterly Index from Preqin only decreased by 3%during 2022,and most investo
135、rs,in particular institutional ones,that participated in mcps Annual Investor Survey saw flat or even positive performance in 2022 when we asked them in Q3 2022.It seems buyers have their questions about these valuations,as exit activity has slowed substantially.According to a recent Bain study,glob
136、al buyout-backed exit value declined 37%in the first six months of 2022 compared to the prior year.One important exit channel,IPOs,was essentially shut down,with a 73%decline year-over-year.In summary,investors private equity portfolios continue to be valued around record levels set at the end of 20
137、21,while exit activity,arguably because of that,has considerably slowed down.In addition,other asset classes in their portfolio have seen larger corrections.As a result,private equity allocations have increased substantially for many investors,leading to pressure to reduce their private equity expos
138、ure.Fortunately,a flourishing secondary market has developed in recent decades that offers liquidity to this illiquid asset class and can help investors to release the pressure.Rather than waiting years for distributions from the underlying fund managers,investors can sell their positions within a f
139、ew months to a secondary buyer.In addition to a straight sale,more customized solutions such as preferred equity,earn-out mechanisms,and deferred purchase price arrangements can be offered.In times of high demand for liquidity,secondaries offer access to high-quality funds at attractive entry prices
140、.PGIM|2023 BEST IDEAS 16 Providing liquidity to the illiquid private equity market also offers various benefits to secondary buyers and their investors.High diversification and J-Curve mitigation have always been key attractions for them.However,in times of high demand for liquidity,such as 2022 and
141、 likely the years to come,secondaries offer access to high-quality funds at attractive entry prices.It is therefore not surprising that the strategy is sought after with investors in mcps survey considering it the second-most attractive strategy,just after mid-market buyout,which always takes the to
142、p spot.As one investor put it:“We are increasingly thinking about a first-time allocation to secondaries,as pricing is becoming very attractive,and secondaries have historically had strong performance after a downturn.”These favorable dynamics are further enhanced by the fact that the capital overha
143、ng multiple,i.e.the ratio of dedicated available capital to last-12-month(LTM)transaction volume,has come down substantially over the last years.As private equity saw record fundraising and deployment numbers the last couple of years,it is obvious that many of these assets will end up on the seconda
144、ry market sooner or later.In summary,a high demand for liquidity for a large amount of private equity assets,coupled with limited capital on the buy-side,represents in our opinion a compelling opportunity for investors.Responses to the Question“How Has Your Private Equity Portfolio Performed in 2022
145、 to Date?”in MCPs 2022 Annual Investor SurveySecondary Capital and Activity(USD bn)Source:MCP 2022 Annual Investor SurveySource:Jefferies 1H 2022 Global Secondary Market Review.6%26%26%26%16%3%3%35%42%16%0%5%10%15%20%25%30%35%40%45%It decreased by more than 10%in valueIt decreased by less than 10%in
146、 valueIt remainded flatIt increased by less than 10%in valueIt increased by more than 10%in valueFamily ofces/foundationsInstitutional investors5587488601321413.0 x2.2x2.6x1.8x3.1x1.8x1.6x(#&%(#%)#&%05003002001920202021H1 2022(LTM)Dedicated available capit
147、alSecondary volumeCapital overhang-(0.8x)0.4x(0.8x)1.3x(1.3x)(0.2x)Capital overhang(delta)17 2023 BEST IDEAS|PGIMFLEXIBLE SPENDING AND OPTIMAL RETIREMENT PORTFOLIOSMany of todays retirement strategies assume that the retirement income goal is fixed,or inflexible,rather than variable,or flexible,when
148、 modeling participant outcomes.This unrealistic assumption implies retirees have neither the desire nor the ability to change their spending over time.In reality,most retirees can adjust their spending if they suspect their savings may not last throughout retirement.Alternatively,if markets do well,
149、retirees can potentially spend more than originally planned.The flawed assumption that retirement spending is static has significant implications on a myriad of retirement decisions,particularly determining the optimal risk level for retirement income-generating portfolios.Retirement Spending:Needs
150、vs Wants In our paper titled“Retirement Income Beliefs,”we discussed the concept of breaking retiree spending into two categories:Needs and Wants.Needs Spending:These expenses are generally less flexible and tend to be recurring in nature.Retirees generally have less discretion over the level or fre
151、quency of these types of expenses.Wants Spending:These expenses are generally more flexible and may be more irregular in nature.Retirees tend to have more discretion in both the level and frequency of these expenses.Distinguishing between the required level of certainty for different types of spendi
152、ng has important implications when thinking about how to invest a retirees assets.For example,a portfolio focused on Needs would likely have a greater focus on downside protection and inflation protection,while a portfolio focused on Wants would have more of a growth focus.PGIM DC SolutionsBy incorp
153、orating spending flexibility into retirement income models,our research shows a notable impact when determining the optimal portfolio risk level for individuals.PGIM|2023 BEST IDEAS 18 Measuring Outcomes The probability of success is a widely used metric that measures the effectiveness of retirement
154、 income solutions and is very common in financial planning tools.We believe using a metric that focuses on goal completion can be more intuitive.For example,if a retiree had a target annual income goal of$100,000 for 30 years but were to fall$1,000 short in the final year of retirement,the outcome w
155、ould be treated as a“failure”using traditional probability of success-related metrics,even though nearly 99.9%of the goal was achieved.Additionally,we think its important to incorporate retiree preferences,via a utility function,when estimating the respective goal completion metric.Utility is a way
156、to measure how someone feels about achieving a given outcome,where the greater the utility,the greater the implied happiness.While both participants in Exhibit 1 are achieving the same income level,the notably different levels of utility can have incredibly important implications for the optimal ret
157、irement income strategy.For example,Participant B would likely benefit more from allocating additional savings to guaranteed income than Participant A,in order to reduce the possibility of a shortfall and the significant penalty(i.e.,disutility)associated with it.Exhibit 1:Utility of Income for Vari
158、ous Goal Funding and Needs LevelsExhibit 2:Optimal Equity Allocation by Age and Needs Percentage for Participants A and B(from Exhibit 1)Moderate Income Volatility Preference and Moderate Risk ToleranceSource:Blanchett and Stempien,2022,“Spending Elasticity and Optimal Portfolio Risk Levels.”Source:
159、Blanchett and Stempien,2022,“Spending Elasticity and Optimal Portfolio Risk Levels.”0%0.000.200.400.600.801.001.2020%40%60%80%100%120%of Total Goal FundedNeedWantExcessUtility$60,000=60 units of utility0.000.200.400.600.801.001.200%20%40%60%80%100%120%of Total Retirement Goal FundedNeedWantExcessUti
160、lity$60,000=20 units of utility007050%NeedsParticipant BParticipant A90%Needs606570758085Optimal Equity Allocation%Participant A:Need Spending Is 50%of GoalParticipant B:Need Spending Is 90%of Goal19 2023 BEST IDEAS|PGIMAnalysis of Optimal Portfolio Risk Levels Using Monte Carlo analysis,
161、we can determine the optimal portfolio risk levels(i.e.,equity allocations)for retirees retirement savings for different situations(i.e.,savings levels,guaranteed income levels,retirement ages,and Needs percentages)and for different preferences.Exhibit 2 demonstrates that while Participants A and B
162、have the same level of retirement savings and the same target annual retirement income goal,there are significant differences in the optimal equity allocations,and glide paths,given their differing projected Needs spending.Participant A,who has more flexibility with retirement spending,can take on c
163、onsiderably more risk at younger ages than Participant B and should decrease the risk level of the portfolio considerably throughout retirement.Overall,our analysis suggests that incorporating spending elasticity into the portfolio optimization process is likely to result in more aggressive portfoli
164、o risk levels for younger retirees and more conservative for older retirees,on average.Incorporating additional factors further customizes the optimal risk level.ConclusionRetirement is significantly more complex than assumed in most retirement income solutions available to DC participants today.A n
165、otable shortfall is the assumption that the retirement spending goal is inflexible,or more simply that a retiree is unable and unwilling to“change course”during retirement depending on how their situation evolves.By incorporating spending flexibility into retirement income models,our research shows
166、a notable impact when determining the optimal portfolio risk level for individuals.PGIM|2023 BEST IDEAS 20 DISCLOSURES For Professional Investor Use Only.All investments involve risks,including possible loss of principal.Past performance is not indicative of future results.The information contained
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