As the world grapples with the ongoing effects of the COVID-19 pandemic, the global economy remains in a state of flux, with many investors and analysts seeking insights into the best ways to manage their portfolios. Here, we look at some key trends and issues in finance and investment, drawing on the latest data and statistics to offer a comprehensive overview of the current landscape.
Inflation in the US
Inflation has been a key concern for investors in recent months, with some experts warning that the US may be headed for a period of sustained price increases. However, recent data suggests that inflation may have peaked as consumer demand and supply chains have eased some price pressures. The annual inflation rate for the United States was 6.5% for the 12 months that ended December 2022, well above the Federal Reserve's target of 2%.
While the Fed has indicated that it will tolerate higher inflation for some time before raising interest rates to curb it, other sources suggest that inflation is still stubbornly high and will require the Fed to raise interest rates more aggressively and keep them elevated for longer. The question on many investors' minds is whether the US can still deliver a soft landing amid these uncertain conditions.
China's impact on global markets
China's reopening after the COVID-19 pandemic has boosted global economic growth as China's consumption and investment pick up and spill over to its trading partners. However, this also leads to a surge in demand for commodities such as copper and iron ore, used in China's infrastructure and manufacturing sectors, potentially increasing inflationary pressure.
There is also the potential for a recovery in Chinese tech stocks, which have been battered by regulatory crackdowns and geopolitical tensions but could benefit from stronger domestic demand and innovation. According to official data, China's GDP growth rate for 2021 was 8.4%, revised up from 8.1%, while the growth rate for 2022 was 2.9% in Q4, down from 3.9% in Q3, as the economy faced headwinds from COVID-19 outbreaks, power shortages, and property woes. The World Bank projects that China's GDP growth rate for 2023 will be 5.5%, equivalent to the combined GDP of the UK and France.
Investing For Recession or Recovery
Investors are debating whether to position their portfolios for a recession or recovery this year. The S&P 500 recently traded at 18.6x price/earnings, with an equity risk premium of 155 basis points above US Treasuries, which is thin. As stock prices have reached even higher levels, there is now talk of a "no landing" scenario in which the US economy never slows down. As a result, investors are seeking lower-volatility stocks, given that quantitative tightening (QT) could lead to more market volatility.
Sustainable investing has become increasingly popular, with investors keen to support environmentally responsible companies. However, there are concerns that some funds may be "greenwashing," making false or exaggerated claims about their environmental credentials. Research shows that 78% of Americans believe companies should be environmentally responsible, and 64% say they feel happy when buying sustainable products.
However, 59% of green claims made by European and UK fashion brands are misleading, while 42% of corporate environmental claims made online are likely to be false or deceptive. Private investors can guard against the risk of greenwashing by researching the companies they invest in, such as checking their environmental reports, certifications, ratings, and third-party audits.
Investing in Property: Best and Worst Case Scenarios
2022 was a mixed year for the property market, with the UK's mainstream housing market experiencing price growth and the London property market starting the year strongly with many offers accepted (Knight Frank). However, the commercial property market has continued to be affected by low transaction volumes due to various factors, including supply chain constraints, global geopolitical headwinds, and inflation.
So, what can we expect from the property market in 2023? According to some experts, the residential property market may see moderate price falls and yield expansion (Knight Frank). However, the best and worst-case scenarios for the market remain uncertain.
The best-case scenario would see a continued strong performance in the mainstream housing market with modest price growth and a stable market. In contrast, the commercial property market is experiencing a recovery as the global economy continues to rebound from the pandemic. In this scenario, interest rates would remain low, and transaction volumes would begin to increase.
On the other hand, the worst-case scenario would see a recession in the UK economy, leading to a significant drop in property prices across all sectors. Factors such as inflation, supply chain disruptions, or global political instability could trigger this scenario.
Investing in Property: Parts of the Commercial Property Market Holding Up
Despite the challenges facing the commercial property market, some asset classes are holding up better than others. According to CBRE and Savills, these asset classes include industrial, logistics, data centers, life sciences, multifamily, and self-storage. These sectors are seeing increased demand as more companies adopt e-commerce and remote working models, creating a need for additional warehousing and data storage.
The Low-Transaction Environment in Property Market
The low-transaction environment that has affected the property market for the past year is expected to continue, at least for the first half of 2023. According to a survey by Urban Land Institute, commercial property transaction volume is predicted to decrease from $800 billion in 2022 to $725 billion in 2023 and $750 billion in 2024. Factors affecting transaction volume include inflation, interest rates, supply chain constraints, and global geopolitical headwinds.
Investing in Sustainable Energy
Renewable energy has been growing at a fast pace globally. Despite capacity constraints such as grid connection delays, planning permission issues, and the availability of land and water resources, renewable energy has been breaking new records. The International Energy Agency (IEA) forecasts a 60% increase in global renewable electricity capacity between 2020 and 2026. According to the IEA, renewable energy installations are expected to rise 8% in 2022 despite rising raw material costs.
Investors interested in sustainable investing must avoid greenwashing, which is when companies make false or misleading claims about their environmental practices. Private investors can guard against greenwashing by researching the companies they invest in and looking for signs of greenwashing, such as vague claims, lack of evidence, hidden trade-offs, or irrelevant information.
The investment landscape for 2023 remains to be determined, with some sectors experiencing growth while others continue to struggle. Investors must remain vigilant and adapt their strategies to the changing environment to take advantage of emerging opportunities while mitigating risks. By keeping a watchful eye on trends and utilizing available data, investors can make informed decisions that are tailored to their specific investment goals and risk appetite.
Alpesh Patel OBE