Bloomberg TalksPGIM President and CEO David Hunt discusses his outlook for 2024. He speaks with Bloomberg's Romaine Bostick and Katie Greifeld.
Please to say.
Joining us right now in studio is David Hunt is the CEO over at PGUM.
Thanks for being here, David, Thanks for having me back.
This has been a year in twenty twenty three that I think defied a lot of expectations. I'm sure you remember we came into this year expecting in recession. We came into this year expecting a lot of pain and equity markets, and we kind of got the exact opposite. And the big question everyone wants to know is whatever led to that this year to the upside? Is that going to continue into twenty twenty four and.
It's so why?
No, It's a great point, and I think all people in the prediction business were led to a lot of humility, I think over the last year, and so I think that the most important thing for long term investors is to focus on what's really changed in the regime. And for us, we believe that over the next few years we will have somewhat higher inflation and somewhat higher rates than we've had kind of in the previous decade. And I think that that's really important because we had a decade before the pandemic when savers were effectively penalized around the world, and it led to this enormous hunt for yield, and it pushed a lot of assets into much riskier things, probably than they had business being. My real hope is that we are now returning to what I think is going to be a healthier balance between savers and investors. Actually retirees and pension funds will do better. And in that higher for longer view, you are going to see a big rotation into credit, and we can already see that beginning to play out in the institutional market. Is we're starting to see some signs of it in the retail market, and I think that's going to be a big theme for next year.
That rotation into credit. What does it come at the expense of.
So in the initial days, a lot of people actually used their public bond portfolio for liquidity and a lot of the money that came out of that because there was a lot of pain obviously as interest rates rose fast when into money market funds, and that's where it's been for the majority of this year.
So what we're seeing now is money is coming.
Out of money market and we expect that to be at a much higher level next year.
People are going to draw down on that.
Excess savings, and institutions are going to draw down on the liquid that they've had, and they're going to be putting that money to work in the public fixed income markets in levels that we haven't seen in a number of years.
And of course, watching just money pile into money market funds while we're at five point nine trillion dollars right now, it's truly one of the more stunning stories it is of twenty twenty three. But let's talk a little bit about that rotation back into credit. You mentioned the public fixed income markets, what about the private credit markets in private markets in general.
Well, I'm really glad you raised that because obviously private credit is a really really important part of certainly our business. I mean, our private alternatives businesses are one of the largest in the world, and we have about three hundred billion that we invest in that and private credit has been probably our fastest growing business. And the reason for that is not only the rate environment, but it's also been that the banks have continued to really be very difficult lenders into this market. They following the gfc's had a lot of capital restrictions put on, and people are expecting those restrictions to get even more punitive over the next year. And so we are seeing that many, many middle market companies are looking for private credit opportunities, and many investors would like to have that in part of their portfolio. And so I think we're kind of only halfway through the real development of a big shift of much more investment by institutional investors into private credit, large across all sorts of strategies.
And it's really interesting to hear that that's your fastest growing business, A question I keep coming back to around conversations around private credit. The growth has been fantastic, But you think about from the investors standpoint, you can have pretty good returns in the public market right now, you think about the high yields in the public fixed income markets, you have a lot more transparency as well. What necessarily is the pitch for private credit over public credit?
Well, as I said, I think the big rotation for the next year is going to be actually into public fixed income. As one of the largest fixed income managers in the world, we really see that across our strategies.
And when you can be paid well.
And people are now comfortable taking some a duration risk, I think you're going to see that rotate very clearly. In in private credit, what you're getting is, at least in our model, you're getting a directly originated product. So we're out calling on middle market companies. We know the companies, and we're able to get covenants and other forms of protection that mean that we are a little bit of a higher return than the public markets, and when things go south, as they inevitably will, we actually have excellent protections for our investors, so our total return over the cycle will clearly be higher.
All right, Well, this could be a big structural change in how people invest going forward.
I am curious about.
I think what I think is probably another big structural change going on, and that's actually in Japan going on with its economy, with its fiscal policy and with its monetary policy, and investors really seem to be trying to front run this right now.
You know.
It's a great point, and I think I think that one of the bright spots around economically has been the story of Japan. I wish I could tell you that they have kind of fully implemented a lot of the governance reforms that many institutional investors have been pressing them for.
But they have made good progress.
The economy itself is in better shape, and they are starting to see some movement on prices, which is you know, for many years they were not able to do so. I do think the story in Japan is more positive than we that we've seen, and at least for US and we have a big business there, that's been extremely good news for our investors.
Is the sense here that the decisions that the government is going to have to make and the monetary policy makers have to make, is that going to draw more people off the sidelines, meaning more born investment coming in or the other fear that a lot of people have had is that the domestic investors there will actually pull back retrench from places like the US and elsewhere.
No. I think you will see more capital going into Japan, absolutely. I mean one of the interesting things that's happening, and I was just there two weeks ago, is that you can feel this pivot globally away from China and toward you know, Korea, Japan, Australia, and you can feel that from a security perspective, You feel that when you talk to a lot of the diplomats, and you feel it from an investor perspective, I want.
To go back to the US. I want to talk about one of the other big stories of this year, which of course has been a commercial real estate, especially coming out of the banking crisis that we saw in March. You said in June that you see sixty percent of the office real estate market in purgatory, that you're going to see a big workout over the next twenty four months. Where are we in that timeline.
I mean, regrettably, we're still in the rather early days of that. I would still hold to my sentiment that a lot of office buildings that were built more than ten years ago are really not fit for purpose, and if they don't have great locations, I think they're going to have a bit of a hard time. But I would also emphasize that real estate is not the same as office. There are many other spaces within real estate that are actually doing pretty well for US. Multifamily has held up better than we would have hoped and has actually been doing well. Specialty real estate, by which I mean senior housing, data center funds, infrastructure has actually all done.
Really well through this.
So I don't want everything to be painted with the same brush as we do in office, which has a long way to work way itself out.
A long way to work itself out. Well, let's talk a little bit more about real estate, bringing it back to the bank and conversation. Banks obviously have a lot tied up in commercial real estate. Have we seen them draw out of the real estate market more broadly and has that created opportunities for you?
It has.
So there's no question that the pressure they've had on capital, as well as the fact that they've had to take some reserves against their holdings, has meant that there's much less money that they're willing to put out into new projects and new developments, and so private capital has really stepped into that. And we're one of the largest private real estate debt providers in the US, increasingly in Europe. And I think that we are absolutely provided we adhere to our underwriting standards and we keep leverage at a reasonable level.
We like the risks that we can take in there.
All right, Well, that's a good place to end at. David, It's really great to see you, especially on set that is PG and CEO. David Hunt
