A Time for Cautious Optimism
Fundamentally, the global economy is in a more optimistic state than many might have dared to hope a few years ago.
Recession has been avoided in major economies, the battle with inflation has seen major progress, and the markets have so far adjusted to the various geopolitical crises. In particular, analysts are happy with the state of the US economy, with most predicting a ‘soft landing’ (i.e. no recession forecasted next year).
But there are also factors to consider as we look toward the future.
First, the ongoing conflicts in Ukraine and the Middle East bring some uncertainty. In addition, major disruption to global trade routes could lead to resurgent commodity prices and imperil the solidifying yet fragile economic status quo.
Second, China faces challenges to its growth, with consumer demand softening and its housing market experiencing pressures. As a key driver of global economic growth, these developments in China introduce some uncertainty, particularly if shifts in trade policy were to re-emerge. Meanwhile, China has launched a significant economic stimulus initiative focused on achieving the government’s 5% growth target. This effort aims to boost consumer demand and promote steady, sustainable growth in retail sales. Overall, there are promising signs for growth stabilization in the world’s second-largest economy, supported by recent stimulus measures and encouraging indicators like retail sales and industrial production.
In addition, the fiscal imbalances in many developed economies, including the US, UK, and Japan, imply that government spending cannot be expected to bolster growth as it has done in the past few years.
What This Means for Investors
The presence of various potential major disruptions, coupled with a lack of obvious fiscal or monetary options for governments to mitigate them, has put 'volatility' at the forefront of everyone's mind. Simply put, market conditions may be subject to swift and unpredictable shifts.
Almost all the analysts surveyed, therefore, recommended the need for building a portfolio capable of withstanding volatility.
This includes seeking out investments in counter-cyclical sectors - such as farmland, energy, and infrastructure - which often have substantial pre-existing government commitments (especially in the context of green initiatives).
It also includes sectors driven by long-term, structural factors such as the aging population (e.g. senior housing and associated medical services).
This does not, however, mean a wholesale ‘flight to safety’, or in portfolio terms, adopting a wholly “defensive” strategy. Rather, it means prioritizing flexibility and agility and keeping a foot in both camps.
Being flexible means that one can take advantage of growth opportunities as well as stable, “safer” bets.
And, as always, diversification remains key. The broader your universe of investing possibilities, the better your chances of weathering a storm of volatility. We’ve pointed out in previous articles that private markets investments are a highly effective means of achieving diversification beyond public markets.
Various commentators explicitly singled out private markets as among the areas of potential growth for investors who are prepared to be proactive in seeking out individual opportunities.
Conclusion
While we recommend reading the available research, it is important to remember that global-level insights are informative but not typically ‘actionable’, particularly if one is looking to identify specific opportunities.
It is possible to make a bad investment in a strong sector if the company is poorly positioned to benefit from the environment. Equally, a good company can outperform its peers as the sector, country, or region overall struggles.
Being flexible means being proactive. This requires more effort than a passive approach, but in a time of high uncertainty, the return more than justifies the cost. We’d be happy to discuss what this means for your portfolio in a 1:1 meeting. Please get in touch if you would like to know more.