PGIM MARKETS Insights on Events Moving the Financial Markets

a PGIM company

 PGIM MARKETS
 Insights on Events Moving the Financial Markets

THE BATTLE OF THE VS: VIRUS VERSUS
VACCINE

On the December PGIM Global Partners CIO call hosted
by QMA, chief investment officers and senior investment
professionals from PGIM’s international businesses, PGIM
Fixed Income and QMA discussed the outlook for markets
and the global economy to year end and the prospects for
2021. In the near term, the battle of the “Vs,” the tug of          John Praveen, PhD
war between virus and vaccine, is likely to be the dominant         Managing Director and
theme as the positive news about vaccine development is             Portfolio Manager, QMA
offset by the second wave of the Covid-19 virus with rising
infections, hospitalizations and deaths and the attendant risks
to economic activity.
A successful vaccine has been developed in record time, less than one year. The
previous record for the fastest time to develop a vaccine occurred in the late 1960s
when it took four years to develop a vaccine for the mumps. Currently, three firms,
Pfizer/BioNTech, Moderna and AztraZeneca reported that their vaccines showed
over 90% success in final clinical trials. The FDA is likely to approve the Pfizer/
BioNTech and Moderna vaccines in in December. Based on comments from the
European Commission President, the European Medicines Agency is likely to
authorize the three leading vaccines by year-end. The UK became the first country
to authorize the Pfizer/BioNtech vaccine, and the companies have said that they are
ready to deliver the first doses to the UK immediately.
QMA Portfolio Manager Ed Keon, Robert Tipp, chief investment strategist at
PGIM Fixed Income, and Ellen Gaske, PGIM Fixed Income’s lead economist
for G-10 countries, all agreed that the vaccine progress was a significant positive
development, though there are still questions about FDA approval, mass production,
storage and distribution. However, Goldman Sachs, in a recent report, said its
baseline forecast “is that large shares of the population are vaccinated by the end of
Q2 2021 in all major DMs [developed markets]. The UK is expected to vaccinate
50% of its population in March, with the US and Canada following in April.”
According to the Goldman forecast, “the EU, Japan, and Australia reach this 50%
threshold in May. As production becomes abundant by mid-Q2, vaccination rises
gradually with demand and surpasses 70% across all DMs in the fall when children
become eligible.” Hence, markets seem to be optimistic that the end of the Covid-19
pandemic and a return to normalcy is a now matter of months, not years.
However, the vaccine optimism is tempered by concerns about rising virus cases,
hospitalizations and deaths. The current wave of infections has prompted renewed
lockdowns and restrictions on activity in the US, Europe and several other countries.
Consequently, after the strong GDP rebound in Q3, economic activity is on track to
slow in Q4, and the weakness is likely to drag into Q1 2021 as the vaccine is unlikely
to be widely distributed until mid-2021. US GDP growth is expected to moderate
into the 3%-to-5% range in Q4, but, as Gaske noted, there are risks to Q1 growth,
namely lingering effects of the lockdowns and winter seasonality. In Europe, growth

For financial professional and institutional investor use only—not for use with the public.
All investments involve risk, including the possible loss of capital.

is expected to dip back into negative territory in Q4, and Gaske is looking for a
W-shaped recovery in Europe.
Given the vaccine-virus cross currents, the big question, according to Keon, is
whether the US Congress can agree on a stimulus package, which could provide a
financial bridge into mid-2021 by which time a sufficiently large number of people
are vaccinated. There appears to be some chance of a stimulus package of between
$500 billion and $900 billion, which could help the nation get through the next few
months before mass vaccinations.
Looking beyond the vaccine-virus cross currents in the near-term, the December
call participants expressed optimism about prospects for a solid economic rebound
in 2021, with easing of political uncertainties, pent-up demand unleashed by the
reopening of economic activity, strong tail winds from fiscal and monetary stimulus
and low interest rates. The economic recovery and strong earnings rebound are
expected to fuel solid stock market gains in 2021.
The end of US political uncertainty and prospects for a divided government
mean some of the less-market friendly parts of the Biden agenda, like tax hikes on
individuals and corporations and regulatory overreach, are unlikely. Another near-
term positive is the easing of Brexit uncertainty, with increased odds of a last-minute
UK-EU deal, which could avert a “hard” Brexit.

The Global Economy Poised to Rebound
With vaccine approval, production and mass distribution in the offing, economies
are on track to reopen and normalize. Given pent-up demand, the global economy
is slated for a robust rebound in 2021. Fresh fiscal stimulus and further monetary
stimulus is likely to provide fuel for the recovery. While a divided government means
fiscal stimulus in the US is likely to be more modest than under a “Blue Wave”
scenario, fiscal stimulus in Europe, Japan and several emerging markets economies
is likely to be significant. Paolo Mazzocca, an analyst at Pramerica Italy SGR,
pointed out that the Italian team is looking for further fiscal stimulus in 2021. Seiji
Maruyama, the chief investment officer of PGIM Japan, indicated that the Suga
administration is compiling a third supplementary budget to finance fresh economic
stimulus, so the Japanese recovery would not lose steam amid the fresh wave of
COVID infections. The recovery is also likely to be supported by low interest rates.
Tipp expects the US 10-year yield to remain in a 0.7-1% range and yields in Europe,
Japan and other markets to remain around current lows.
Global GDP growth is expected to be in the 5%-to-6% range in 2021 after
contracting around -4% in 2020. The US economy is expected to fire on all cylinders
with solid consumer spending, a rebound in capital expenditures, red-hot housing
and inventory rebuilding. With the economy growing at a solid, above potential
pace, job growth should continue and unemployment should decline, reducing the
slack in the labor market. Gaske’s forecast is for US GDP to grow around 4.5% in
2021, with risks to the upside. This is above the consensus forecast of around 4%,
after contracting around -3.5% in 2020. Gaske also anticipates that as the vaccines
are rolled out, there is likely to be a rotation from spending on goods to increased
expenditures on services, boosted by pent-up demand for services.
Among other countries/regions, Eurozone GDP is expected to grow around 4.6% in
2021 after the sharp -7% contraction in 2020. Given the deep hole in 2020, Mazzoca
and the Italian team expect the Eurozone economies to return to pre-COVID-19
levels only by 2022. The UK economy, which suffered one of the sharpest declines
in 2020, with growth estimated to have contracted by -11.2%, is on track to a strong
rebound in 2021 with over 5% GDP growth. The Japanese economy is expected
to grow by around 2.5% in 2021. In China, the first country to recover from the
pandemic and the only country to post positive growth in 2020, around 2%, growth
is expected to strengthen further in 2021 to around 8%. Bevan Yeh, the equity chief
investment officer at PGIM SITE expects Taiwan’s economy to grow around 4%

For financial professional and institutional investor use only—not for use with the public.
All investments involve risk, including the possible loss of capital.

in 2021. PGIM India’s chief investment officers, Srinivas Ravoori and Kumaresh
Ramakrishnan, expect India to re-emerge as one of the fastest-growing emerging
markets, with a double-digit GDP rebound in 2021 after contracting -9% in 2020.

Strong Earnings Rebound
After the collapse in corporate profits and earnings in 2020, and with GDP growth
on track to a solid recovery in 2021, corporate profits are expected to rebound
sharply. Consensus forecasts are for S&P earnings per share to grow between 25% to
30% in 2021, to around $175, after declining around -15% to $136 in 2020.
Earnings for Eurozone companies are expected to rebound around 50% in 2021
after the sharp -37% decline in 2020. Japanese earnings are on track to recover
around +43% in 2021 after a relatively modest -9% decline in 2020. Emerging
markets (EM) earnings expectations for 2020 have been improving to a modest -8%
decline for 2020. EM earnings are expected to rise 32% in 2021.
The strong earnings recovery is likely to drive equity market gains in 2021 after P/E
multiple expansion lifted stocks higher in 2020. Given the 2020 gains, stocks are
currently on the expensive side, as P/E multiples have risen given the strong price
gains and decline in earnings. Hence there is less scope for multiple expansion, and
robust earnings growth is expected to fuel the rally in 2021.
The equity rally in 2020 was driven largely by stay-at-home stocks and growth
sectors. Region-wise, the US, and tech-heavy Asian EMs, China, Taiwan and Korea,
posted strong gains in 2020, while Europe, Japan and cyclical-oriented emerging
markets lagged. In 2021, stock market gains are likely to broaden across sectors and
regions.

The Bottom-line
After struggling in September and October, global stock markets enjoyed a strong
rally in November with easing of US election uncertainty and significant progress
on the vaccine front. The rally was broad-based with big gains in cyclical and value
sectors and regions, and small caps.
With Santa Claus arriving early this year, the December CIO call participants
discussed the outlook for markets and the economy to year-end 2020 and the
prospects for 2021. With US election uncertainty largely over and a divided
government more likely, the tug of war between the vaccine and virus is likely to be
the key determinant of the market trajectory to year-end and in early 2021.
Looking beyond the near-term vaccine-virus cross currents, the December call
participants expressed optimism about prospects for a solid economic rebound
in 2021 with easing of political uncertainties, pent-up demand from reopening
of economic activity and strong tail winds from fiscal and monetary stimulus and
low interest rates. The robust economic rebound and strong earnings growth are
expected to fuel further, broad-based stock market gains in 2021.

 IN OTHER NEWS...

 PGIM Fixed Income contributed the following analysis.
    • When evaluating global growth forecasts for Q4, a few observations become
      apparent. After strong rebounds in Q3, several pockets of potential “W” shaped
      recoveries appear set to emerge amid sizable negative Q4 growth projections of
      -9.0%, -8.0%, -11.5%, and -7.8% in the euro area, the UK, Poland, and Turkey,
      respectively.
    • Although Q4 global aggregate growth of 4.5% appears on pace to attain Q4 2019
      levels in early 2021, a sizable gap will remain between the pre-virus projections for

For financial professional and institutional investor use only—not for use with the public.
All investments involve risk, including the possible loss of capital.

global potential growth. Furthermore, when China is excluded, the Q4 aggregate
     growth projection of 2.15% shows a longer return to Q4 2019 levels and a widening
     gap to pre-virus projections for global potential growth.
  • Within the US, we continue to see a binary outcome across the labor market. While
    total non-farm payrolls are back to about half of their pre-pandemic levels, those
    workers who have kept their jobs are likely working longer as average working weeks
    recently jumped to nearly 35 hours, which is the longest since at least 2006 and may
    bode well for hiring in 2021. Meanwhile, wages in the US have recovered to their
    pre-virus levels, but not to their prior trend, and additional demand for labor could
    push wages towards that trend level next year.
  • We’ve looked at the relationship between teleworking and salaries as it pertains to
    the pandemic’s effect on income inequality. In the US, we found that the higher
    the share of an occupation’s ability to telework, the greater its salary. For example,
    occupations where teleworking comprises more than 40% (e.g., computer/
    mathematical, legal, and business/financial operations jobs) have an average salary
    of $83,000, and of the bottom 10 industries in terms of teleworking (e.g., personal
    care, healthcare services, and building/grounds cleaning), only two have salaries of
    $50,000 or more. Therefore, many workers in occupations where telework is possible
    may not only have kept working through the pandemic, but may have also continued
    earning higher wages, thus likely widening the wealth/income inequality gap as
    economies emerge on the other side of the virus.
  • The US inflation outlook appears set to shift between near-term and intermediate-
    term expectations, but with similar policy implications. For example, after a 0.01%
    decline in October, core PCE inflation stands at 1.41% over the prior 12 months.
    Yet, supply bottlenecks and shortages combined with the spring’s low base effects
    could push inflation into the 2.50% range by April 2021. However, we believe the
    Fed is well aware of these temporary effects and is unlikely to adjust policy as a
    result. Over the intermediate term, the markets continue to show a more subdued
    inflation backdrop as the US 5-year forward breakeven of 1.94% is indicative of a
    core PCE rate of 1.5%, which would also be unlikely to prompt a policy reaction
    from the Fed.

For financial professional and institutional investor use only—not for use with the public.
All investments involve risk, including the possible loss of capital.

For Professional Investors only. All investments involve risk including the possible loss of capital. Past performance is
not a guarantee or reliable indicator of future results.
These materials represent the views and opinions of the author(s) regarding economic conditions, asset classes, and
strategies. Distribution of this information to any person other than the person to whom it was originally delivered is
unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof,
without prior consent of QMA LLC (“QMA”) is prohibited. Certain information contained herein has been obtained from
sources that QMA believes to be reliable as of the date presented; however, QMA cannot guarantee the accuracy of such
information, assure its completeness, or warrant that such information will not be changed. Any forecasts cited are for
informational purposes only. There can be no assurance that forecasts will be achieved.
These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other
financial instrument or any investment management services and should not be used as the basis for any investment
decision. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from
any use of the information contained in or derived from this report. QMA and its affiliates may make investment decisions
that are inconsistent with the views expressed herein, including for proprietary accounts of QMA or its affiliates. These
materials are for informational or educational purposes. In providing these materials, QMA is not acting as your fiduciary.
In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures
Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of
the Securities and Futures Ordinance (Cap.571).
In Europe, certain regulated activities are carried out by representatives of PGIM Limited, which is authorized and
regulated by the Financial Conduct Authority (Registration Number 193418), and duly passported in various jurisdictions
in the European Economic Area. QMA LLC (QMA), which is an affiliate to PGIM Limited, is an SEC-registered investment
adviser, and a limited liability company. PGIM Limited’s Registered Office, Grand Buildings, 1-3 Strand, Trafalgar Square,
London WC2N 5HR. These materials are issued by PGIM Limited to persons who are professional clients or eligible
counterparties as defined in Directive 2014/65/EU (MiFID II), investing for their own account, for fund of funds, or
discretionary clients.
In Japan, investment management services are made available by PGIM Japan, Co. Ltd., (“PGIM Japan”), a registered
Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is
provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong
to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures
Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore
investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and
an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional
investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited
investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South
Korea, information is issued by QMA, which is licensed to provide discretionary investment management services directly
to South Korean qualified institutional investors.
PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with
Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. QMA and the QMA logo
are registered service marks of PFI and its related entities. The Rock design is also a service mark of PFI and its related
entities, registered in many jurisdictions worldwide.
The opinions expressed herein do not take into account individual client circumstances, objectives, or needs and are
therefore are not intended to serve as investment recommendations. The financial indices referenced herein is provided for
informational purposes only. You cannot invest directly in an index. The statistical data regarding such indices has been
obtained from sources believed to be reliable but has not been independently verified.
Certain information contained herein may constitute “forward-looking statements,” (including observations about markets
and industry and regulatory trends as of the original date of this document). Due to various risks and uncertainties, actual
events or results may differ materially from those reflected or contemplated in such forward-looking statements. As a result,
you should not rely on such forward-looking statements in making any decisions. No representation or warranty is made as
to future performance or such forward-looking statements.
Certain information contained in this product or report is derived by QMA in part from MSCI’s Index Data. However,
MSCI has not reviewed this product or report, and MSCI does not endorse or express any opinion regarding this product
or report or any analysis. Neither MSCI nor any third party involved in or related to the computing or compiling of
the Index Data makes any express or implied warranties, representations or guarantees concerning the Index Data or
any information or data derived there from, and in no event shall MSCI or any third party have any liability for any
direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any use of this
information. Any use of the Index Data requires a direct license from MSCI. None of the Index Data is intended to
constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and
may not be relied on as such
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or
accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior
written approval. Copyright 2020, J.P. Morgan Chase & Co. All rights reserved.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. FTSE
Russell is a trading name of certain of the LSE Group companies. “FTSE Russell®” is a trade mark of the relevant LSE
Group companies and is/are used by any other LSE Group company under license. All rights in the FTSE Russell indexes
or data vest in the relevant LSE Group company, which owns the index or the data. Neither LSE Group nor its licensors
accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data
contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant
LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this
communication.
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”).
BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under
license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays
Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness
of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and,
to the maximum extent allowed by law, shall have neither any liability or responsibility for injury or damages arising in
connection therewith.
Copyright 2020. Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. Standard & Poor’s including its
subsidiary corporations (“S&P”) is a division of The McGraw-Hill Companies, Inc. S&P and/or its third-party licensors
have exclusive proprietary rights in S&P data. S&P data may only be used internally for business purposes and shall not
be used for any unlawful or unauthorized purposes. Dissemination, distribution or reproduction of S&P data in any form
is strictly prohibited except with the prior written permission of S&P. S&P does not guarantee the accuracy, adequacy,
completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained
from the use of such information.
QMA-20201207-339

PI5949 Ed. 12/20 Expiration: 6/30/2021

For financial professional and institutional investor use only—not for use with the public.
All investments involve risk, including the possible loss of capital.