while economies across the world are strong lofty valuations for public companies and the likelihood of interestrate hikes mean investors are resetting their expectations for returns “this next phase of the economic cycle is definitely going to be slower than the recordbreaking rally and pivot in the cycle that we saw over the last two years” says amanda agati chief investment officer for pnc financial services asset management group “we think it’s going to be a much tougher slog” keep in mind this more challenging outlook comes after a year when the sp 500 index rose nearly 27 capping a threeyear period when the broadmarket index was up more than 90 according to dow jones market data for 2022 the sp 500 is projected to gain 9 which in a nonpandemic environment would certainly be considered a “home run for largecap domestic equities” agati says but relative to the last three years it’s certainly lower when it comes to public debt pnc is even more cautious while the bank expects a “lowerforlonger” interestrate environment to persist for the next several years its economists do expect rates to move higher globally in 2022 putting price pressure on most categories of bonds in its 10year forecast pnc predicts the bloomberg us aggregate bond index of intermediateterm corporate and government bonds will return 23 annually while the bloomberg global aggregate exus markets index will return 2 the bright star for pnc across the “multiasset universe” agati says is alternative investments—private equity private debt and venture capital “there are a lot more opportunities in alternatives for meaningfully additive returns relative to public markets going forward” she says penta recently spoke about these opportunities with agati who is responsible for the investment policies guiding pnc private bank and pnc private bank hawthorn which works with family offices she also guides the investment policies for pnc institutional asset management in a slowergrowing world agati says investors are focusing on companies offering innovation and growth “and they’re willing to pay up for it to a degree” she says they will find most of these opportunities are in private markets while nothing is “tablepounding cheap” even in private equity the return expectations are higher mainly because of the premium investors receive by agreeing to lock up their money for longer privateequity funds typically have fixed terms of 10 years investing in private equity however is a multiyear process as the strongest portfolios are diversified collections of funds with different vintage years meaning the date the funds begin to put capital to work “each vintage year is unique and diverse relative to the others” agati says privateequity funds investing in 2022 for instance are likely to be shaped by an increase in mergers and acquisitions buyouts and specialpurpose companies fueled by “still unprecedented fiscal and monetary support” the bank wrote in a firstquarter investment strategy report funds investing this year also will be working against a backdrop of heightened stock market volatility and uneven economic growth—both of which could create pockets of opportunity “the ballast that privateinvestment strategies can bring in particularly volatile times—not being beholden to quarterly earnings calls and the drivers around updating guidance in an uncertain backdrop—can provide comfort in portfolios” agati says life sciences are a “real area of innovation and investment” that has been catalyzed by the pandemic in technology more broadly there’s a boom in innovation particularly related to the metaverse or the creation of virtual worlds “the tech sector has really been able to use the pandemic to its advantage pulling away from the pack and continuing to invest and allocate capital and drive innovation” agati says more entrepreneurs this year also are likely to harness blockchain technology to develop new companies and products opportunities that will likely be made available through venturecapital funds this “could be a very interesting vintage year for some of those exposures to take hold” she says another theme that isn’t necessarily specific to 2022 as a vintage year is impact investing in local communities “there’s this real homegrown feeling of responsibility and duty for those who are impactoriented or responsible investingoriented to try to find a way to have the impact in their own backyard” agati says one potentially bright spot in public debt is emerging markets which are driven by variables outside of us federal reserve policy pnc expects the bloomberg emerging markets aggregate bond index to return 62 annually over the next 10 years that is partly because of current valuation levels but also because pnc expects low rates globally will drive demand for emergingmarket debt also lofty levels for commodities exported from emerging markets have made government balance sheets in many of these countries stronger according to the 2022 outlook “the growth outlook for emerging markets in general is one of the brightest in the multiasset universe” agati says because individual countries could experience unexpected tensions or shocks pnc recommends investors consider investing in this sector through actively managed funds it’s definitely a place “where astute active managers can add value to tilt toward or away from benchmark exposures” she says wealthy investors also can consider private debt funds which invest in belowinvestmentgrade loans mezzanine funding and distressed or special situation funds according to pnc that’s because the drivers for privately issued debt are not as closely tied to the movement in interest rates as in public markets agati says that means the cost of capital for borrowers in private markets is relatively low providing more runway for dealmaking “even though parts of the private market cycle and the economic cycle are further along from the bottom of the pandemic we don’t think the private debt cycle is there” agati says “it just creates a more interesting opportunity for investors” but as with emerging market debt investing in private debt is enhanced by active managers that’s in part because managers can reprice their investments quickly in response to changing conditions according to pnc “allocations to private debt may be among the first to benefit from opportunities that arise among rapidly growing industries looking for new sources of capital”