FEATURED RESEARCH:

Turbulent Teens IV
Quantitative Management Associates
In this year-end edition of “Turbulent Teens,” we update two issues we addressed in earlier versions: equity and bond valuation, and the ongoing crisis in Europe. We also examine two issues many investors are increasingly concerned about: the long-term outlook for the U.S. and the rest of the developed world, and the potential for a real estate-induced bubble busting in the largest emerging market, China. This report consists of four themes: Valuation, U.S.-West Decline, Europe and Emerging Markets. (more)
 

The More Things Change, The More They Remain The Same
Prudential Fixed Income
Despite the dampening effect of the European crisis, Prudential Fixed Income expects the U.S. recovery to continue. While fiscal consolidation may temper growth slightly in 2012, it is not expected to start in earnest until 2013. As a result, credit fundamentals should remain robust., and despite the 2011 bull market in U.S. Treasuries, Prudential Fixed Income says there is still value to be found in fixed income. While markets may remain volatile, spread sectors, such as corporate bonds, structured product, and emerging markets, are likely to outperform in 2012. (more)
 

On the Market: What Went Up, Came Down
Prudential Fixed Income
The last few years of low interest rates have been like an exclamation point at the end of a three-decade bull market. So what should we expect to happen next? Many market analysts and pundits anticipate that rates will eventually move back to a higher range, especially given continued fiscal laxity. However, based on historical factors and events, Prudential Fixed Income concludes that the wait for much higher interest rates might prove futile. (more)
 

Cap Rates and Interest Rates: A Conundrum, Or Not
Prudential Real Estate Investors
Commercial real estate, both public and private, presents a compelling opportunity for investors today. Not only does the sector provide many long-term investment benefits, including healthy income returns and a hedge against inflation, but in coming years fundamental factors such as the supply/demand cycle are set to turn positive while demographic forces look to be favorable. The growth associated with rising economic activity - including job creation and increased consumer spending - should translate into higher demand for commercial properties. (more)
 

U.S. Quarterly Outlook

Prudential Real Estate Investors
A year-end improvement in economic indicators gives rise to hope that sustainable economic expansion will finally take root. However, markets remain wary of another shock caused by the unresolved sovereign debt crisis in Europe and political infighting in the build-up to the 2012 election. The likelihood is that the recovery will continue at a moderate pace for another year or more until a full-fledged recovery takes root. Reasons for optimism on the economy include the fairly robust December job growth, especially in the private sector; continued strong corporate profits and balance sheets; pent-up demand for consumer products; low interest rates and inflation; and progress in deleveraging that has reduced the debt burden of families and corporations. The good news is tempered by factors that include persistently high unemployment rates; ongoing volatility in financial markets; weak growth in personal income; the struggling housing market; the high public debt burden; and tight credit conditions, especially for small businesses. (more)

Latin American Quaterly Outlook

Prudential Real Estate Investors
Latin America was the recipient of strong capital inflows in the first half of 2011, but investors viewed the region with more caution in the second half. That led to the depreciation of currencies and prompted some countries to relax monetary policy. The eurozone sovereign debt crisis has produced a downshift in market sentiment globally, and reduced the growth outlook for China, which is a major destination for commodities from Brazil and Chile. Investors have increased their risk aversion toward emerging economies,even Latin America, which does not engage in much business directly with Europe. Brazil has had surprising resilience to external shocks in recent years, but the impact of the uncertain global economy has finally arrived. GDP growth in 3Q11 was flat due to slowing industrial activity and a decline in both government and household spending. Still, Brazil’s economic environment is sound, and the country’s sovereign long-term debt was upgraded by S&P in December. The Brazilian government has announced a financial stimulus package to boost growth. Growth in Mexico has surprised on the upside, and inflation is in check. That could change, however, as the eurozone crisis and a global retreat from emerging market assets triggered a weaker peso. (more)

European Quarterly

Prudential Real Estate Investors
Europe looks to be heading for its second recession in three years as industrial output and private spending growth have faltered in line with the deterioration in sentiment that began last summer. The key downside risk to growth is the ongoing delay in resolving the eurozone crisis. The early signs point to a shallow downturn. Policymakers appear to be moving in the right direction, and recent actions by the European Central Bank to ease liquidity worries have helped. The outlook remains tied to a two-tier Europe, with the highly indebted countries around the eurozone periphery expected to lag the rest of the continent. (more)

Asia Pacific Quarterly Outlook

Prudential Real Estate Investors
Fueled by government investments and strong domestic consumption, Asia-Pacific economies continue to grow robustly. Growth will be challenging in 2012 amid the weak global economic environment, but the region’s resiliency should enable it to weather any slowdown. Although China’s economy is expected to decelerate in 2012, we believe the government is committed to meaningful growth, especially with a change of leadership scheduled this year. The challenge will be to boost domestic consumption among the country’s 1.3 billion population. That would compensate for the anticipated slow growth in exports, as demand from the US and Europe will likely be subdued. Asia’s employment market expanded in 2011, resulting in lower unemployment rates. Hiring in 2012 may be muted due to economic volatility, but the long-term employment uptrend should remain intact and produce higher household income. The region’s inflation rate was stubbornly high in the second half of 2011. Inflation is likely to level off in 2012, as consumer demand will become more price sensitive given the softening economy. Central banks are likely to ease their monetary policies at a measured pace in 2012. While the cost of debt will gradually fall, lenders are likely to underwrite more conservative terms given the soft economic prospects. (more)

The More Things Change, The More They Remain The Same

Despite the dampening effect of the European crisis, Prudential Fixed Income expects the U.S. recovery to continue. While fiscal consolidation may temper growth slightly in 2012, it is not expected to start in earnest until 2013. As a result, credit fundamentals should remain robust., and despite the 2011 bull market in U.S. Treasuries, Prudential Fixed Income says there is still value to be found in fixed income. While markets may remain volatile, spread sectors, such as corporate bonds, structured product, and emerging markets, are likely to outperform in 2012. (more)