Over the festive period our collective thoughts turned to the world in 2023 – its trajectory and the economic backdrop to the decisions we will all make as the new year unfolds.
We are a ‘glass half full’ cohort and, as we read and listened to commentary in-between overeating and travel between home and friends, it became clear that although 2023 will have its challenges we have, in recent years, increased our overall resilience to tackle these head on.
2022 felt like a transition year – the world moved into some form of normality after the main effects of the pandemic passed even with the war in Ukraine delivering an economic shock which impacted growth but not determination.
Better days ahead? For sure. But not without some ‘heavy chop’ as pilots like to call it. So, in no particular order, apart from the final thought, here are our ‘lucky 13’ takes.
Inflation Matters
- What goes up will come down, eventually and patchily
It was only a few years ago that politicians and economic commentators suggested that many countries had ‘tamed inflation’ to the point it was no longer ‘a thing.’ The speed at which inflation has ratcheted up – driven by a heady cocktail of supply chain issues, labour shortages and then soaring energy prices – has taught a new generation (or two) of the pernicious effects of inflation.
The erosion of economic value is a hard lesson for many, especially when it is combined with a drop in income because of the falling value of many asset classes, which we refer to throughout this perspective.
Thankfully, inflation may have peaked in some major economies and be approaching that peak in others. Its reduction is the keystone of economic recovery. Until then all investors can do is find safe passage through resilient assets.
Winter (Capital) Markets
- The thaw will come but until then it is an icy time
Other than for the largest private equity institutions, increasing interest rates have hampered the activities of portfolio companies. They are leveraged, lowering their options and moving value towards the lenders. As debt matures, it is an increasing headache.
That freeze of liquidity also results in statis on business sales and renewed investments. This is a temporary slowdown but the longer it goes on, the more casualties there will be.
All eyes are on the US Federal Reserve. Some believe interest rates will peak by the summer and then fall by Q4, while others think high rates will continue into next year. Our view? Hope for the best and plan for the worst.
Build It And They May Leave
- Post-Covid needs realignment continues, with recessionary pressure
Commercial Property faces major challenges throughout 2023. Post-pandemic workplace trends have slowed down a headlong rush back to central business districts, and now corporate downsizing will further reduce the need for space. San Francisco is one of the more extreme examples with significant vacancies due to a third factor – over exposure to the tech sector. The City is now floating the idea of conversion to housing units.
The retail sector has clusters of optimism but a reinvention of workplace and commerce is overdue, particularly as bricks and mortar have a permanence that sometime outlives the investment rationale.
Bear With US
- The stock market bears are with us for some time
Last year, over $33 trillion in value was wiped off global stock markets. The consensus is that 2023 should see moderate double low double-digit gains but it does not look like a frothy recovery anytime soon.
Much depends on economies either escaping recession – the IMF have already warned that a third of the world’s economy is already in one – or that the recession is mild. If the US, in particular, escapes a deeper recession, stock recovery will be faster and fuller. Ultimately, much depends on how the economy responds in the next 6 months.
Decrypting Crypto
- Trials, investigations, and regulation will be the common theme
Throughout 2022, crypto has generated more headlines than profits for many and that looks like a trend that will continue into 2023.
The failure of some ‘coins’ and the evaporation of investor value has, sometimes brutally, shown the risks of a nascent asset class, which lacks the consistency of governance and regulation.
Lawmakers are getting anxious and the ongoing criminal investigation into FTX and Sam Bankman-Fried will only add to the pressure to regulate. Not to mention some bitcoin miners face uneconomic conditions because of the price of electricity.
Expect fewer crypto success stories this year.
Location, Location, Location
- The housing market is volatile and city dependent
High interest rates and general economic uncertainty always results in a slowdown in housing market activity. This year will be no different. People are staying put unless they have a geopolitical need to be somewhere else. Step forward candidate city no. 1 – Hong Kong. There, home sales have dropped by 40% and are now at their lowest levels since the 2008 financial crisis.
NFT – Not Free of Tangible
- NFT sceptics will continue to be vindicated
In 2022, those siren voices proclaiming NFTs as the ‘next big thing’ grew decidedly weaker. With few exceptions, values and trading volumes tailed off as the year progressed. Those brands that continued to invest credibility in NFTs were careful to align the digital offering with physically tangible items and rewards.
In a subtle shift, the NFT became a digital talisman that allowed entry into the ‘real world’, which felt very counterintuitive even if it did prop up some value. 2023 is unlikely to lessen the decline. Tangibility is key with people ultimately wanting to know they can touch their investment, knowing it exists beyond the ether.
All That Glistens
- With increasing interest rates, gold loses its luster
‘Hold gold in a crisis’ is a maxim as old as time. However, in the context of higher interest rates, it feels like a riskier investment. Not to mention, it has experienced turbulence despite hitting record highs at the year end.
For a ‘solid option’, sometimes it feels like it is not for the faint hearted. Moreover, its longer-term health is now inextricably linked to interest rates. If rates pivot down sooner rather than later, gold will benefit.
The Weakest Link
- Supply chains repaired now they adjust
One of the many fall outs of the pandemic was the world coming to appreciate that, with few exceptions, most economies are hugely dependent on exceptionally long, and often thin, supply chains. Inventories are no longer stored in warehouses but ‘on the water’ or ‘in the air.’ At the height of the supply chain ‘crisis’, we even saw car manufacturers down spec their vehicles to reduce the need for computer chips.
Yes, that is largely over, but now lessons have been learned. An over reliance on China is seeing some global manufacturers diversify their manufacturing and supply resource. Apple, with fingers burnt over plants in China closing because of Covid, is now switching capacity to India.
Companies need to be fleet of foot and build up stocks... that comes at a price.
Big Tech Growing Pains
- The teenager is all grown up and needs to pay their way in the world
The economic crunch could not have come at a worse time for the ‘big tech’ sector. It was already facing a ‘coming of age’ moment in terms of effectively monetizing its offering and showing true profitability, and now it is having to reduce costs at pace as investment dries up.
Despite a bold vision from META and the future of VR, less headsets shipped last year than the previous year.
This may well be the catalyst for mergers, failures, and pushing the actual cost of delivery to the consumer, as well as ongoing downward pressure on valuations.
To The Moon And Back
- Space exploration now less about national pride, more about resource
Just before Christmas, NASA finally launched its Artemis 1 mission to the Moon. The most powerful rocket in history, the unoccupied Orion capsule flew 1.3m miles on a 25-day flight to test the hardware and support systems for sending humans back to the lunar surface and beyond. The next mission will take humans around the Moon (2023), and the one after that will land (2025).
Meanwhile, China has also announced the goal of landing its own team on the Moon by the end of this decade, it seems highly likely they will do that with a couple of years to spare. Beyond this new ‘space race’, Elon Musk’s SpaceX launched 62 missions in 2022. That fact alone underlines the commercial drivers behind a renewed interest in space. As rare metals here on Earth become rarer, the attractiveness of asteroid and planet mining increases. Science fiction – maybe – but things are moving quickly.
Black Swans A Swimming
- Less rare than hen’s teeth, brace for the next one
It was Nassim Nicholas Taleb who popularised the concept of ‘Black Swan Events’. However, of their three characteristics – rarity, unpredictability, and severity of consequence – it feels in recent years the ‘rarity’ factor may well be overplayed. COVID-19 was a black swan for most of us despite experts repeatedly warning against pandemics in the age of mass intercontinental travel. Russia’s invasion of Ukraine was another, again not without warnings.
Both the pandemic and Ukraine, because of energy and agricultural implications, massively impacted the global economy with few households or organisations immune from the effect.
This reminded us of the late US Secretary, Don Rumsfeld’s, derided and then accepted view of ‘unknowns.’ It is worth quoting it – “there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know.”
Black Swans are really “unknown unknowns” and the only way of protecting against those is broad investment diversification because when they strike the impact is immense and unforgiving.
Art Is The Deal
- And then there was art
Last year, the 10 top art lots sold at auction for more than $1.1 billion. From Warhol to Magritte, the resilience of art matched with self-perpetuating passion underlined that not only is art a significant asset class in its own right, it is one which is highly investable.
The MINTUS view is that in a turbulent age it provides a uniquely balanced alternative investment option – a combination of intellectual rigour and endurance that many other investments cannot come close to.
Art has a transparency, an intrinsic value, an independently verified pedigree, and the sort of tangibility that investors need in these challenging times.
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