Although headline inflation is declining in the US, we expect a recession to start in H2, with the economic slowdown leading to interest-rate cuts in 2024. Europe has avoided a recession for now but inflationary pressures are forcing central banks to continue hiking rates, which could lead to negative growth later in the year. The UK economy has stagnated and the decline in real incomes has led to a cost-of-living crisis. China’s economy, on the other hand, is rebounding post-Covid and inflation has been less of a problem than in developed markets.

Private Equity

Against a backdrop of rising rates and high inflation, fundraising in 2022 proved challenging with just €53 billion raised in Europe and $343 billion in the US. However, PE deal activity was up year on year in Europe and, with dry powder increasing to over $2 trillion across all global strategies, managers will be able to react quickly to new opportunities in 2023.

The economic environment leads us to focus on smaller companies and specialised/niche managers who have proven through-the-cycle returns and expertise with long-term trends. These companies/managers have the experience to deliver positive outcomes for investors, especially in sectors like IT, healthcare and financial services.

Infrastructure

 In the US, the 2021 Infrastructure Bill has provided a boost, with significant resources are committed to upgrading infrastructure. We believe this will generate demand across key social and economic infrastructure assets with stable long-term revenues. In Europe, government spending on infrastructure is also expected to increase. The energy-security sector will remain a priority as the conflict in Ukraine continues to disrupt supplies of oil and gas from the east.

Further, demand for digital and data infrastructure as well as renewables should also remain solid into 2024, especially those that are driving the energy transition.

Real Estate

 We prefer industrial and residential sectors in the US. We have high conviction across last-mile logistics and smaller-footprint industrials across residential assets in sunbelt markets and gateway cities. 

The market in Europe is going through a revaluation driven by higher interest rates and debt costs. However, opportunities still exist across residential, alternatives and logistics as these sectors remain undersupplied. 

In APAC logistics, there could be more opportunities in the urban segment across South Korea and Australia, as well as in offices in Seoul and Singapore. In China, the end of zero-Covid quickly unleashed services activity, but industry, buildings and trade are dragging. The expectation is that services should still support growth but uncertainty remains on where real estate will settle in the long-run.

Private Credit

With inflation and interest rates remaining high, we expect to see an increase in defaults. However, private credit is still an attractive way to borrow and it should continue to overtake syndicate loan volumes. Dislocation in the market is creating opportunities and lenders can demand stronger covenants. As ever, deal quality remains crucial, so we'll be looking for assets that offer a good risk/reward balance and downside protection.

Natural Resources

Demand for oil in the US remains high but pressure is growing on carbon-intensive sectors to reduce their emissions and transition to renewable energy. With interest rates expected to stabilise and the Inflation Reduction Act providing a strong tailwind, low-cost renewable power, the growth of carbon markets and even the role of timber could present opportunities as we transition to net zero.

In Europe, sanctions have reduced Russian exports of oil and gas, which is still affecting domestic energy production. While governments are investing more in energy autonomy and renewables, prices – and inflation – remain high. Despite the headwinds, investors still have a strong appetite for exposure to the energy sector and wider natural resources markets.

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