Prudential Fixed Income: Global Economy Should Continue to Grow in 2003; Prudential Expects Lower Quality Credits to Outperform Higher Quality Credits.

Business Editors

NEWARK, N.J.--(BUSINESS WIRE)--Jan. 14, 2003

The economy should continue to grow in 2003, with the United States leading the way and Europe lagging behind, while Japan remains moribund, Prudential Fixed Income said today in its 2003 Market Outlook. Prudential Fixed Income, the primary public fixed income asset management business of Prudential Financial, Inc. (NYSE:PRU).

"We expect a better economic environment this year than in 2002," said Patricia Cook, chief investment officer of Prudential Fixed Income. "Corporations are likely to continue to show improved profits and ultimately some top line growth, despite low inflation levels. However, for cyclical industries to see sustainable improvement, industrial production and capital expenditures much pick up, because consumers cannot hold up the economy indefinitely."

While GDP growth should be higher in 2003 than in 2002, that improvement should not generate enough concern to require tightening by any major central banks through the fix six months of the year, Prudential Fixed Income said. Most likely scenarios for the Federal Reserve include remaining on hold, cutting short rates further, or "jawboning" long rates lower, while the European Central Bank will most likely cut rates in 2003.

Prudential Fixed Income also expects corporate credit quality to improve. "We believe that the worse of the corporate credit events are behind us and that with improved profitability, credit quality will also continue to improve," Cook said. "We should also see a less risk-averse environment thanks to the fortuitous combination of low Treasury rates and an improved corporate bill of health."

Added into the mix is the potential for a confrontation in the Middle East, which is likely already built into the market. Engagement would likely fuel a flight to quality, further widening spreads between high and low quality assets. "A quick, successful resolution of any conflict would be sure to ignite a rally that would return spreads to more reasonable historical norms," Cook said.

For 2003, Prudential Fixed Income's own strategy favors emphasizing lower quality U.S. sectors along with some non-U.S. exposure. The following outlines some of Prudential's outlook:

-- Investment Grade Corporates:

Corporate bonds should perform better this year than in 2002. Prudential Fixed Income continues to find pockets of value in select issues in telecom, utility, healthcare, along with some airline Enhanced Equipment Trust Certificates.

-- High Yield Bonds:

The current environment favors high yield bonds: an improving fundamental backdrop is supported by a strong market demand for yield. In addition, underlying credit quality has begun to improve for the first time in five years. Prudential Fixed Income favors such industries with stable to improving fundamentals as healthcare, media, gaming and cable. In addition, the company also likes some distressed sectors, such as utilities, telecom and airlines.

"We are emphasizing companies with improving levels of free cash flow and access to financial markets," Cook said. Cook said. "We're also assessing some of the recent fallen angels for investment opportunities."

-- Emerging Markets:

The market environment should continue to be positive. Like other sectors, spreads in many countries have tightened dramatically, so country selection and timing of trades will drive returns. Prudential Fixed Income continues to overweight Latin America and has positions in Asian corporates.

-- Non-U.S. Hedged:

Canadian bonds should perform well relative to U.S. Treasuries, given their lower valuations. In addition, the very high real yields offered by New Zealand's bonds also offer investors good opportunities. Prudential Fixed Income is also keeping a close eye on Europe, given that its growth is expected to be lower than growth in the U.S. That suggests that yields could remain low or decline in 2003.

Prudential Fixed Income, a unit of Prudential Investment Management Inc., is one of the largest fixed income managers in the United States, with more than $145 billion in assets under management as of September 30, 2002, for institutional, retail, and internal clients worldwide. Prudential Fixed Income offers institutional clients Enhanced Index, Core, and Core Plus strategies as well as single-sector management. Prudential Investment Management Inc. is the asset management business of Prudential Financial.

Prudential Financial companies, with approximately $533 billion in total assets under management and administration as of September 30, 2002, serve individual and institutional customers worldwide and include The Prudential Insurance Company of America, one of the largest life insurance companies in the U.S. These companies offer a variety of products and services, including life insurance, property and casualty insurance, mutual funds, annuities, pension and retirement related services and administration, asset management, securities brokerage, banking and trust services, real estate brokerage franchises and relocation services. For more information, visit www.prudential.com.