Last updated: 07:20 / Friday, 9 January 2015
2015 Outlook

Prudential Experts: Investors Should Prepare for a Lower Return Environment Relative to Historic Returns

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Prudential Experts: Investors Should Prepare for a Lower Return Environment Relative to Historic Returns
  • Prudential market experts expect moderate growth in 2015 – led by the United States – and continued low yields for bonds and yet another strong year for the stock market
  • “June would be my liftoff date for a rate hike from the Fed, but they will do it very slowly and patiently"
  • “This prolonged low interest rate and low growth economy has investors looking for new options to generate retirement income”

Prudential market experts expect moderate growth in 2015 – led by the United States – as global economies continue to recover. Outlining their views at Prudential Financial, Inc.’s 2015 Global Economic and Retirement Outlook discussion, they said any growth is likely to be uneven across the globe and in the face of increased and prolonged volatility.

Ed Keon, managing director of QMA, said the current environment will lead to continued low yields for bonds and yet another strong year for the stock market.

“Bond yields have stayed low after the end of quantitative easing for a simple reason: bond demand is very strong, and bond supply is modest. Strong demand and modest supply means high prices in any market, and leads to low yields for bonds,” Keon said. “In the short run, stocks can continue to perform well as low interest rates support higher than normal valuations, but higher valuations carry a long-term cost. Eventually expected returns of stock and bond portfolios might be lower than historical norms, creating challenges for many investors.”

Mike Lillard, chief investment officer of Prudential Fixed Income, agrees that the outlook for stocks is more attractive than for bonds. Lillard also believes interest rates will remain low with the health of the economy weighing heavily on any Federal Reserve decisions.

“June would be my liftoff date for a rate hike from the Fed, but they will do it very slowly and patiently. If the economy begins to soften, however, they will stop to avoid sending us into another recession,” said Lillard. “They are going to be highly data dependent, and at the end of the day, our expectation is that they won't be able to get short term rates very high.”

Quincy Krosby, a Prudential market strategist, warned that the recent slide in oil may not be as beneficial as Fed members make it out to be. She also questions whether a rate hike by the Fed could ultimately harm the economy.

“While consumer spending may have increased in the United States, the Fed needs to worry more about what lower energy prices mean globally. It could be signaling a decrease in demand in places like China, Europe, and Japan, which could lead to decreased production and job cuts in the energy sector,” said Krosby. “Taking that into account, the Fed also has to keep in mind that when rates rise, something always breaks. There’s no telling what asset class may start the ball rolling, but it can’t come as a surprise. That said, it has been the velocity of the oil price plunge that caught markets off guard. Consumers, however, are net beneficiaries of lower prices.”

John Praveen, chief investment strategist for Prudential International Investments, cautioned that divergent monetary policies from central banks are likely to lead to volatility in the coming year and that current and future geopolitical risk cannot be dismissed.

“The start of quantitative easing in Europe and possibly Japan will allow for greater expansion in those markets compared to the United States, yet any unforeseen risks could derail that proposition,” Praveen said. “Europe was supposed to be on an upswing in 2014, but Putin’s actions held any potential rally in check. With such interconnected global economies, any geopolitical or major risk can hold everything back.”

Sri Reddy, head of full service investments with Prudential Retirement, recognizes that this low growth environment described by Prudential’s market experts will challenge investors to think creatively when it comes to retirement income and will cause a shift in how retirement products are structured.

“This prolonged low interest rate and low growth economy has investors looking for new options to generate retirement income,” Reddy said. “Things like automatic enrollment plans, auto escalation options, and enhanced defined contribution plans need to become more of an industry norm to secure retirement income for today’s workers. With people living longer than ever before, the industry needs to continue to adjust.”

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