Aman Bahel, Global Head – Business Development, Apex Group
With 2022 drawing to a close it’s safe to say that for institutional and individual investors alike, it has been a challenging year. Globally the economy has been trying to manage rising inflation and the debt incurred during the COVID-19 pandemic. This already difficult situation has been compounded by the Ukraine conflict, and the pressure this has put on global supply chains and European energy supplies.
So, what will 2023 have in store? Will this be the year the inflationary spike peaks? And if so when? What impact will technological advances have on global markets? The state of the global economy, and the world in general, remains highly dynamic, but here are some of the themes that might influence investment decisions over the next twelve months.
Inflation peaks and the bulls return?
While much of the western world remains dogged by rising inflation, with many struggling to manage rising prices, there are signs that we may be nearing the peak. At the supranational level, the IMF has speculated that we may have already hit peak inflation. In the US too, the Federal Reserve is still hiking base rates in an attempt to curb price rises, but slower than expected increases to base rate suggests a corner might be turned in 2023.
While 2022 has been choppy in the markets, with the S&P 500 down nearly 17% on January 2022 (as of writing), 2023 could see bulls wrest some control back from the bears. While a great deal of uncertainty remains in the global outlook, it feels as though this has been well and truly priced in by investors now. And, with the end of inflation in sight, it might be that the proposition of bargain stocks begins to outweigh downside concerns in investors’ minds.
Private debt markets draw investment
Private equity vintages are expect to deliver attractive returns during the distressed market conditions to come. But what of private debt? In 2023, we expect to see a substantial increase in allocation to private debt, as investors seek returns uncorrelated from turbulent market conditions. Private debt will attract significant attention, with its correlation to shorter term benchmarks which are well protected against interest rate hikes. This demand for private debt comes at a time when bank lending and public markets on the continent are becoming restricted, and companies seeking to fund growth require alternative sources of capital.
Of course, distressed assets and special situations will also draw investor attention. This reflects trends seen in previous cycles, with private debt markets performing well in times of stress – with limited defaults.
Not easy being green
While many sectors and investment classes have struggled in recent years, one area that has seen consistent and impressive growth is ESG aligned investing. Investors are ever more aware of the environmental and social impacts of their investments and are determined to make the right decisions.
For fund managers too, measuring and understanding ESG is no longer a “nice to have”. If 2022 has taught us anything, it is that social, environmental and geopolitical uncertainty is very much a reality. So, central to prudent investing in such an environment is being aware of reducing exposure to this risk and mitigating future risk too. Globally, ESG funds are growing faster than many other asset classes out there and 2023 is likely to see ESG funds proliferate.
Key to making this work, however, will be the building of international standards for monitoring and regulating ESG claims. Greenwashing remains a pertinent issue, with the potential to erode trust in funds that are making claims that can’t be backed up. The roll out of the EU’s Taxonomy Regulation is a step in the right direction and we are likely to see further action at the international level to tackle greenwashing and make it easier for investors to invest in ways that reflect their commitment to positively impacting the world around them.
Technology-enabled democratization of private markets
Technology continues to drive change in all areas of our lives, and investment and finance is no exception. This technology brings both opportunities and risks for institutional and individual investors alike.
In 2023, private markets will continue to participate in the growing trend of opening up access to retail investors, as they seek out new sources and pools of capital. This “democratization” is expected to continue further in 2023, driving greater demand for transparency and information from investors. In order to facilitate this, private markets are turning to the digitization of fund processes including onboarding, transaction capturing and reporting to name a few. The ability to deploy technology solutions to remove the friction of traditional manual processes will be a key differentiator for private asset managers in the year ahead.
For institutional investors, technology is making it ever easier to track and monitor ESG metrics which will help in the fight against the greenwashing described above. AI and automation more generally make the information gathering and reporting necessary for robust ESG compliance more accessible, especially for substantial organisations with complicated supply chains in multiple geographies. So, as the drive to achieve ESG increases in line with consumer expectation, more and more businesses will embrace these technologies.
Outlook
Despite current headlines, it is not all doom and gloom, with the current macroeconomic conditions offering an inflexion point for business leaders. Similarly, to during the height of the COVID-19 pandemic – the companies and asset managers that will succeed are those that are able to embrace uncertainty and seek out the opportunities for innovation to support their clients in times of market dislocation.
