Investing in a Slowing Economy

In such a complex world, with high economic shocks and risks, flexible solutions with their many risk premiums should help.

The global economy is slowing down, and much of it is priced in by the market, but the economic outlook remains uncertain. Analysts’ forecasts range 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 prospects

As the global economy slows down and central banks tighten monetary policy, inflation should start to slowly decline. However, some supply-side factors may keep inflation in check. These include, but are not limited to, ongoing supply chain restrictions, ongoing or recurring Covid-19-related lockdowns, a slowdown in real estate growth, and Russia’s retaliatory measures (a natural gas embargo already accompanied by a supply slowdown).

The European economy is feeling the negative impact of very high inflation on consumption – growth is unlikely to slow to 2.6% this year and 2% next year, as is widely expected. Energy prices could rise further due to limited supply, but as the global economy slows, prices are expected to stabilize at a lower level, which could provide some relief. For example, the supply chain pressure currently seen in northern German ports should ease over time, bringing comfort. As a result, corporate earnings growth is likely to disappoint at low levels as investors learn to be more patient and focus more on moderate long-term growth.

The US economy is expected to start slowing down as personal savings decline and borrowing from credit cards for home equity lines increases, even as the Fed slows down the economy. On the other hand, inflation should start to come down, helping real incomes and consumption. While it is difficult to predict inflation and growth in a tight labor market due to non-linearities and lack of historical examples, we are in between different economic scenarios, from decent to stagflation or a recession in 2023, leading to stock market volatility. .

China’s economy is slowing rapidly after Covid-19 related policies and the real estate crisis. While the impact of the lockdowns is easing and the measures are helping, the impact of the property market on the heavily indebted economy suggests tough times are yet to come.

2. Market overview

Big tech companies tend to grow amid long-term economic growth and innovation, which is currently in question. On the other hand, the “Value” style combined with “Quality” is much more realistic (eg Coca-Cola, Air Liquide). Chinese technologies are especially interesting in the face of climate change because the country is the main producer of many green technologies. As fears of a rapid global economic slowdown fade, we see post-shock opportunities in some technology and/or disruptive stocks.

What does it mean?

In such a complex world, with high economic shocks and risks, flexible solutions with their many risk premiums should help. Publicly traded infrastructure and real estate should continue to help hedge inflation, as should the defensive features and alpha capabilities of covered bond strategies. This challenging environment is a reminder of the long-term importance of ESG.