Investing in a slowing economy

The global economy is slowing, and much of this is being taken into account in the markets, but the economic outlook remains uncertain. Analysts’ forecasts are diverse: from a soft landing to a recession. This environment of divided markets and high uncertainty offers tactical and strategic advantages, especially for long-term trends such as ESG.

1. Economic worldview

As the world economy slows and central banks tighten monetary policy, inflation must begin to decline slowly. However, some supply factors may keep inflation under pressure. These include, but are not limited to, current supply chain restrictions, maintaining or repeating the blockade associated with Covid-19, a slowdown in the real estate market, and Russian repression (a natural gas embargo with already slowing supplies).

The European economy is experiencing a negative impact of very high inflation on consumption – growth is unlikely to slow to 2.6% this year and 2% next, as expected by consensus. Energy prices may rise further due to limited supply, but as the global economy slows, prices are expected to stabilize at lower levels, which may provide some relief. For example, the pressure on the supply chain, which is now observed in the ports of Northern Germany, should ease over time, providing comfort. As a result, corporate earnings growth is likely to be disappointing at low levels, while investors are learning to be more patient and increasingly focused on moderate long-term growth.

The US economy is expected to slow due to declining personal savings and an increase in credit card loans to domestic equity lines, even as the Fed slows the economy. On the other hand, inflation must begin to decline, supporting real incomes and consumption. Although it is difficult to predict inflation and growth in a hard labor market, due to nonlinearity and lack of historical examples, we find ourselves between different economic scenarios, ranging from decent to stagflation or recession in 2023, which will lead to stock market volatility. .

China’s economy is slowing rapidly due to Covid-19 policies and the real estate crisis. Although the impact of quarantine measures is diminishing and measures are helping, the impact of the real estate market on a high-debt economy suggests that hard times are ahead.

2. Market view

Large technology companies tend to value against the backdrop of long-term economic growth and innovation, which are now in question. On the other hand, the style of value combined with quality is much more realistic (eg Coca-Cola, Air Liquide). Chinese technology is interesting, especially under the pressure of climate change, as the country is a major producer in many parts of green technology. As fears of a rapid slowdown in the global economy subside, we see opportunities to take advantage of the following shocks in some technologies and / or destructive actions.

What does it mean ?

In such a complex world with high economic shocks and risks, flexible solutions with their multiple risk premium should help. Infrastructure and listed real estate should continue to help hedge against inflation, as well as the hedging and alpha capabilities of covered bond strategies. Such a complex environment is a reminder of the long-term importance of ESG.