Globally, labour productivity has slowed over time
Source: Macrobond (November 2022).
Supply pressures should continue to ease in the near term and inflation is likely to moderate. But from a long-term perspective, growth in the supply side of the global economy has slowed down, which means the next economic cycle will be characterised by higher interest rates, greater underlying inflationary pressure, more stop-start gross domestic product (GDP) growth, and less countercyclical policy support for economies and asset prices.
Recessions often follow sharp increases in interest rates
Source: Macrobond (November 2022).
With inflation eroding real incomes and interest rates rising sharply, recessions are likely in early 2023. But the US, UK, and European economies should all be recovering in the second half of the year. With China likely to accelerate steadily through the year as policy easing steps up a gear, the global economic landscape should be much improved towards the end of 2023.
Renewables will continue to become more cost efficient1
Source: BloombergNEF (November 2022).
The global energy crisis has brought concerns about energy security and cost to the fore for consumers, businesses and governments alike. A renewables-based energy system is likely to be both more secure and cheaper than a fossil fuels-based system, so recent developments should ultimately accelerate the transition to a low-carbon energy system.
With interest rate expectations peaking out, inflation likely to moderate, and the major developed world economies set to enter recession, 2023 should be a good year for debt markets. High-quality sovereigns are our favoured exposure and duration looks attractive. Some caution is warranted for credit and select emerging markets as recessionary conditions could see risk spreads rise in some areas.
The derating sell-off is mostly behind us, in our view. But earnings could now come under pressure as revenue growth slows in line with the deterioration in global growth in the first half of 2023. But if onshoring continues, as we expect, the beneficiaries will likely be construction and engineering firms, railroads, and consumer discretionary firms. If inflation falls, this would provide an additional boost to consumer-exposed corporates. If it doesn’t, highly levered firms and those in regulated industries could be negatively affected.
Infrastructure is a standout. It offers inflation protection, defensiveness, high yield, and exposure to structural growth drivers, all of which should be attractive to investors in 2023. Agriculture, with its inflation hedge characteristics and consistent return delivery, also looks attractive to us. The rise in interest rates globally means the near-term outlook for real estate is more challenging. High-quality buildings with healthy cash flows and premium tenants, and assets in attractive locations where there are demand-supply imbalances, should continue to perform solidly.
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