Dec 09 2022
Global Outlook

The Investment Outlook 2023

As we look back on 2022, to describe the year as eventful seems an absurd understatement. So many events have dominated the news, each individually significant, and in aggregate almost overwhelming in consequence, both politically and economically.

Here’s a reminder of just a few of those events:

The invasion of Ukraine by Russia and the continuation of a war that many people thought would be short-lived.
The sustained rise in inflation expectations to a 40-year high, ending the hope that inflationary conditions would be ‘transitory’.
The turmoil in the UK gilts, or government bond, market following the country’s ‘mini budget’ in September that triggered a spike in long-term interest rates and havoc in pension funds that use a liability-driven investment approach.
An escalation in geopolitical tension between the United States and its allies, with China.
A global cost-of-living crisis with rising mortgage costs and unprecedented fiscal support measures for energy and food targeted at the most vulnerable in many countries.
A slowdown in, or reversal of, growth expectations with regards to key tech companies leading to a significant loss of shareholder value and job cuts.

Climate crisis uncertainty

Yet all these things will be relatively short-lived in their impact (and manageable) when compared to the existential threat that continues to grow relatively unabated from our failure to make progress on constraining global warming to the agreed target of 1.5°C.

COP 27, the climate change conference held this year in Egypt, largely failed to expand on commitments made a year earlier with regards to phasing out fossil fuels, despite all the strong statements made around the necessity to do so.

The one major step forward was the agreement of a deal that has been sought for over 30 years to launch a fund for ‘loss and damage’ to support those nations most exposed to the consequences of climate change. But details and financial funding have not been agreed.

We can already observe more extreme weather events – notably the recent floods in Pakistan – which have devastating effects on impacted economies and contribute to the risk of a steady but dramatically expanded flow of migrants to other countries.

Don't give up

But, as the old saying goes, where there are challenges, there are also opportunities.

Here’s where we see them:

Tackling climate change, both in terms of mitigation and solution, will require trillions of dollars of investment each year for the next three decades at least;
Reconfiguring supply chains (to shorten and make them more secure);
Building security of energy and food supplies to rely less on a single supplier;
Replacing inefficient infrastructure for transportation, energy supply and distribution;
Funding the science and applied research needed to create the solutions not available today;
Rebuilding Ukraine.

Reasons to be optimistic

It’s easy to be overwhelmed by all the uncertainty. That said, we’ve also seen steady progress in many places that may offer an antidote to the gloom:

The investment industry is better equipped than ever to steward capital into productive assets that meet society’s expectations of it.
Policy makers are finally seeking to unblock obstacles that constrain investment flows from long-term savings pools into infrastructure and patient-capital science-based assets.
Industry leaders are, at last, prioritizing capital investment over share buybacks, particularly in Europe.
Employment prospects are strong, particularly for younger workers as many older workers who were close to retirement brought plans forward during the pandemic.
Many of the big trends that have caused concern are forecast to improve in 2023 – the inflation and interest rate outlooks will likely moderate next year; fiscal conditions are expected to remain supportive with major elections scheduled in 2024; China is expected to gradually remove Covid restrictions and re-open its economy.

2023 may well be a pivotal year for markets amid the economic challenges that remain. While these are clearly important, we mustn’t take our eyes off potentially existential long-term issues.

In this edition of the rebranded Investment Outlook, my colleagues Paul Diggle and Maximilien Macmillan explain why the market may be under-estimating the severity of next year’s recession and what this may mean for the timing of subsequent rate cuts.

Andrew Millington suggests that equity investors will be hoping for a much better 2023. But even with markets trying to anticipate the recovery, share prices still face significant obstacles next year.

James Athey wonders whether 2023 will be the comeback year for bonds as inflation is brought to heel, monetary policy eases once again and on the attractiveness of fixed-income assets on a relative-value basis.

Our hedge fund expert Darren Wolf looks at several strategies – macro, event driven, credit and equity hedge – that may prove useful in helping investors navigate uncertainty.

Meanwhile, Neil Slater urges investors to look beyond rising-interest rates and diminishing affordability when assessing real assets, as variations in geography, sectors and strategies will prove even more important.

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