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03 December 2015

Investment experts see ‘a universe of opportunities’ for investors in 2016

Photo of Ed Keon
Ed Keon at Prudential Investment Management’s 2016 Economic and Markets Outlook.
Strange forces must be at work when the chief investment officer of one of the world’s largest fixed income businesses says equity’s the place to be in 2016 in the chase for returns.

“In an environment where rates are going to stay low, what we feel from investors is that they need more return; they’re desperate for return,” said Prudential Fixed Income Chief Investment Officer Mike Lillard during Prudential Investment Management’s 2016 Economic and Markets Outlook event in New York City. “That’s going to lead them to add risk to their portfolios over time. So, from a broad asset class perspective, the worst place to be is in cash and the best place to be is in stocks.”

Lillard was quick to add that within fixed income, “there’s lots of opportunity to add value,” and it’s in areas such as high-yield debt, particularly with defensive sectors like utilities. Within investment grade sectors, he said Prudential Fixed Income favors big U.S. money center banks, which are “really stable from a debt-holder perspective.” Finally, the company also finds great opportunities within high-quality structured products, like AAA collateralized loan obligations and AAA commercial mortgage-backed securities.

Peter Clark, managing director and portfolio specialist for Jennison Associates, said, “I hope in 2016 we’re a little more selective and treat emerging markets equities not so much as an asset class, but instead think of it as a universe of opportunities—country, sector and companies.”

Clark likes the consumer discretionary, information technology and health care sectors, “where we see high levels of innovation and very powerful business models that are producing that very long duration higher growth, which is what the market continues to reward.”

Peter Hayes, managing director and global head of investment research for Prudential Real Estate Investors, cited two themes heading into 2016. “First is a lack of ‘grade-A, quality real estate’ in the United States and the United Kingdom, leading to a focus on major cities. In addition, Hayes explained, “We like active asset management—the repositioning, redevelopment, refurbishment of locations around the world,” particularly in Europe and developed Asia.

Ed Keon, managing director and portfolio manager, QMA, said he prefers “returns from riskier assets over returns from safer assets.” He isn’t making any big bets for 2016 and expects to stay relatively close to benchmarks, while slightly overweight on global real estate.

“I think the change in 2016,” he said, “might be that those (currency) hedge positions that worked so well at the beginning of 2015—and worked well recently—it may be time to rethink those and invest directly in European equities and Japanese equities. And we think that, in the short run, it’s really hard not to like the stronger dollar idea. But I have a feeling that’s kind of getting close to running its course.”

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