With rate cuts expected in 2026, bonds are likely to outperform cash, according to PGIM.
The firm’s 2026 outlook highlights shorter-duration assets, such as ultra-short bonds, short-duration fixed income and securitised bonds, as offering attractive income with stronger total return potential than cash.
PGIM also recommends capitalising on opportunities across the yield curve.
“Further Fed easing could steepen the yield curve by keeping long rates anchored while short-term rates decline, creating opportunities on the front end of the curve.”
Co-chief investment officer of public and private fixed income Gregory Peters said bonds continued to navigate economic uncertainty in 2025, extending an impressive bull market.
“With a stable economy and the Federal Reserve poised for rate cuts, conditions remain favourable for fixed-income assets,” Peters said.
According to the firm’s outlook, continued Fed rate cuts toward a neutral target range of 3.00 per cent to 3.25 per cent hinge on two key developments: a shift in Fed policy and a weakening labour market.
“A potentially more dovish Fed, particularly when Chair Powell’s term ends in May 2026, could result in a lower, steeper yield curve … a softening US labor market, which prompt further Fed easing, could spark a short-to-intermediate-term bond rally, even as long-term inflation risks persist,” he said.
Meanwhile, PGIM says intermediate bonds can help diversify equity risk and deliver attractive risk-adjusted returns, particularly in risk-off environments. “Extending duration now to lock in higher rates before further Fed cuts using a barbell approach (i.e. combining short-and long-duration strategies) may smooth the return sequence.”
“Money market assets remain near record levels, representing a massive potential source of demand for stocks and fixed income, particularly as falling cash rates incentivise a shift out of money markets,” Peters said.
With uncertainty around US inflation and indebtedness likely to rise, PGIM suggests considering other developed sovereign bonds to mitigate US-specific risks. “Emerging market debt, especially in local currency, continues to offer diversification and attractive carry.”
Private credit
As headwinds intensify and economic uncertainty persists, PGIM says investor concerns around private credit are growing.
“We believe the asset class will continue to offer strong risk-reward dynamics, particularly for investors who partner with disciplined and experienced managers.”
The firm says seasoned managers are expected to differentiate themselves by maintaining disciplined underwriting standards.
“A conservative approach, emphasising strong covenants, prudent loan-to-value, leverage and fixed charge ratios, and limited PIK exposure at underwriting – combined with diversification across stable industries and regions – is critical for mitigating risks. These strategies are essential for navigating market uncertainties and preserving value through 2026 and beyond.”
Equities
Despite volatility driven by macroeconomic uncertainty and ongoing questions around AI investment monetisation, PGIM says 2025 proved to be a strong year for global equity markets.
Global markets are expected to remain fluid in 2026, according to Jennison head of global equities Mark Baribeau, shaped by shifting macroeconomic conditions, geopolitical developments and rapid technological change.
“Against this evolving landscape, it will be important to focus on enduring secular demand drivers and high-quality companies, such as those providing tangible AI monetisation opportunities.”
Selectivity will be critical, Baribeau said, as headwinds from fiscal policy shifts, trade tensions and persistent inflationary pressures compete with tailwinds from resilient earnings, strong consumer demand and the broad adoption of advanced technologies.
While early AI investment centred on infrastructure and computing power, PGIM says attention is shifting toward applications poised to redefine industries.
“Companies are leveraging AI to accelerate product development, enhance customer experiences, and extract richer, more actionable insights from data … The rise of autonomous AI agents has the potential to revolutionise customer service, logistics and product development.”
“Generative AI is changing course from an investment perspective, transitioning from infrastructure buildout to monetisation through groundbreaking applications that enhance productivity and reshape entire industries,” Baribeau said.
Meanwhile, emerging markets are driving demand for fintech platforms, which remain less exposed to tariff pressures than traditional goods.
PGIM notes consumer brands face challenges as demand softens in price-sensitive segments, though leading luxury brands continue to demonstrate durable pricing power and sustained growth.
“Investing in companies that span multiple secular themes, driven by innovative products and strong competitive advantages, can help investors better seize opportunities in the next phase of the growth cycle.”
“Healthcare innovation remains a major opportunity” in 2026, supported by AI-driven drug discovery, mainstream personalised treatments and advanced data analytics.
REITs
Several factors point to a favourable environment for listed REITs in 2026 and, according to PGIM, monetary easing and structural trends will support markets such as Japan (reform-driven), Australia (data centre expansion) and Singapore (industrial resilience).
“The global real estate investment trusts (REITs) recovery gained momentum in 2025. Now, with inflation moderating and the Fed set to lower rates, the outlook appears promising for income-focused assets offering stable returns and growth potential as markets improve,” head of global real estate securities Rick J. Romano said.
He said thin construction pipelines – the result of years of elevated financing costs, tariff pressures and labour shortages – are supporting rent growth and property values across most sectors.
“Aging demographics and digital transformation fuel durable demand for senior housing, logistics, and data centres,” Romano said.
