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Last year was a humbling experience for investors and asset managers, primarily as central banks continued their seemingly ever-lasting push against inflationary pressure that stemmed from the global pandemic that’s now nearly four years in the rear-view.
Contemptuous attitudes towards central banks' flurry of monetary interest rate hikes left many seasoned professionals from pulling their hands out of the pot and rushing to park their cash in inflation-buoyant investment.
However, inflationary pressures have started to decompress around the world. Following a peak at around 10% in the summer of 2022, central banks quickly turned on the backburners to provide some sense of stability and curtail the possibility of a recession.
Geopolitics Continues To Threaten Globalization
A topic that once dominated media headlines - recession - turned out to be a hit and miss, at least in some part, with experts now suggesting that the Federal Reserve has managed to approach a soft landing, as inflation continues to trend downwards and U.S. consumer sentiment remains steady, along with strong employment figures.
Elsewhere, however, economic conditions continue to be picking up the leftover pieces of the pandemic, including snarled supply chains, geopolitical tension, and underwhelming economic growth indicators.
In China, the world’s second-largest economy, recent data indicates that although the country managed to reach its initial target growth of 5.2% in 2023, overwhelming political pressure and prolonged headwinds are causing bigger issues for parts of the country’s economy, including manufacturing, real estate, and employment.
China’s topsy-turvy relationship with the United States and other Western Allies continues to hamper their economic recovery, along with many countries now offloading manufacturing and development domestically in an attempt to gain economic influence back home, instead of outsourcing.
China’s government continues to seek new international relationships with investors in an attempt to lure them back and ratify their attitudes regarding the country's economic recovery strategy.
Over in Europe, tensions between Russia and Ukraine since the invasion back in February 2022 continue to play out on the larger part of Europe’s economic prosperity. Russia remained a lead importer of natural gas and crude oil for Europe, however, due to the sensitive nature of Europe’s backing of Ukraine, Russia mobilized and seemingly, weaponized its imports to the continent, sending energy prices soaring.
Up until 2021, Russia accounted for 44% of natural gas imports and 28% of crude oil imports to Europe. While the EU continues to push ahead with new strategies that could incorporate more environmental solutions for the continent's energy crisis, inflationary pressure still holds a damper on near-term recovery.
More than this, experts are beginning to signal alarm bells regarding Europe’s industrial productivity. Month-on-month productivity continues to be on a decline, with overall EU production falling 0.2% in November 2023, marking the third consecutive month of declines.
On a year-over-year basis, industrial output is shrinking, with November estimates down 5.8%, following a 5.4% decline in October.
Now, another threat is looking to hamper the bloc’s economic outlook for the year, following an attack on crude oil ships passing through the Red Sea. Earlier in January 2024, Valdis Dombrovskis, EU Trade Commissioner warned that increasing tension between Western nations and the Middle East is prolonging economic recovery and placing mounting pressure on Europe’s oil and energy prices.
Alternatively, the EU, UK, and U.S. could be looking to use another route that passes by the Cape of Good Hope in South Africa, although officials estimate that this could add an extra month of delays to an already strapped global supply chain.
Supply chain problems are not only hurting natural resource delivery, as some manufacturers across Europe, including American-based Tesla, Volvo, and Suzuki have all announced the suspension of production at some European factories due to supply chain issues taking place in the Red Sea that have caused delays of critical components.
Resilience is becoming harder to achieve, and emerging economies elsewhere could be seeing new opportunities arriving on their shores in the long term, as industrialized economies look towards alternatives that could potentially provide them with more economic solutions.
Decarbonization and Davos
Another hot-button topic that continues to remain on the minds of many investors, asset managers, and economists is decarbonization. Perhaps now, more than ever, governments around the world are trying to initiate long-term, and potentially, near-term strategies that would place environmental concerns as their top priority for the year.
This is seemingly fitting, with the 54th Annual World Economic Forum (WEF) Davos now underway in Switzerland, which would see several heads of state, including Ukrainian President Volodymyr Zelensky, Israeli President Isaac Herzog and U.S. Secretary of State Antony Blinken and National Security Adviser Jake Sullivan joining more than 60 special guests at the international gathering.
This year, all eyes are on Davos, and what would come from the annual meeting. Governments and private entities have experienced mounting pressure regarding environmental efforts in recent years, and the potential threat climate change can have on the world.
This comes at a literal turning point, following the release of a special report that indicated that 2023 was the hottest year on record, and minimal intervention could further propel the world into a climate catastrophe.
Experts estimate that global average temperatures were 14.98 degrees Celsius in 2023, roughly 0.17 degrees warmer than the previous record of 2016.
Now, where does this leave investors and portfolio managers moving forward? For starters, we could see a generous flow of incentivization towards areas that can help reduce climate change, especially towards institutions that already have ESG (Environmental, Social, and Governance) policies in place.
This however creates a challenging narrative for investors and fund managers to support, following the weak performance of ESG assets in 2023. Last year witnessed a steep decline in new deposits for assets classified as “responsible investing” according to LSEG Lipper Data.
Roughly $68 billion of new deposits were recorded for responsible investment assets in 2023, less than half compared to the $158 billion in 2022, and a fraction compared to the $558 billion in 2021.
Additionally, ESG-focused investment vehicles across all asset classes are seeing declining support, according to the 2023 Sustainable Investment Survey conducted by Harvard Law School Forum on Corporate Governance.
Per their investigation, researchers have noticed a steady increase in the share of limited partners not intending to do any sustainable investment work. This number has risen from 11% in 2021 to roughly 20% in 2022 and up again in 2023 to 23%.
More than this, both limited partners and those that identified to either conduct business as an investment adviser, consultant, investment manager, or accounting manager or had an established relationship with one indicated that they have outlined to drop support for ESG-focused investments due to concerns following a screening of potential opportunities.
In fact, 45% of limited partners, investment advisers, investment managers, and account managers said that they have declined to make a recommendation on an ESG investment following initial screening.
This creates a challenging forward-looking strategy for advisers, fund managers, and investors. The reality is yet clear on whether ESG investment and the broader attempt at decarbonization will help to deliver a profitable return.
Without a determining solution, and knowing where broader government support will stand in the coming years, advisers and investors continue to backpedal on their initial ESG-focused investment strategies.
The World Heads To The Polls
This year will see nearly half - around 49% - of the world’s population take to the polls as they cast their ballots, with 64 countries, including the European Union holding democratic elections.
Across the world, key political elections, in the U.S., UK, Russia, Taiwan, and the EU will further determine the economic turbulence that investors could expect. More than this, this year, elections will cast a heavy shadow over the future of democracy, especially in developing nations where tensions have been bubbling under the surface for decades.
It’s still unclear on whether Ukraine will hold a general election this year, as President Zelensky seeks to hold office for another term, as his ratings continue to hold high in the face of political turmoil with Russia.
The U.S. presidential election which is set to take place later this year is perhaps one of the biggest “elephants in the room” as The Times Magazine describes it.
The Republican Party has yet to announce a potential candidate, however, more than 70% of American republican voters have said they’d be satisfied with former President Donald Trump taking the helm of the GOP and potentially securing a second term.
Historical statistics suggest that presidential election outcomes generally have a limited impact on the market. More than this, key policy changes often require a one-party “sweep” of both The White House and Congress.
Data by U.S. Bank estimates a 3.85% change in the average three-month S&P 500 return during the period where the Democrats control The White House and Republicans have a majority in Congress. In an opposite scenario, the three-month S&P 500 return during this period would be 1.19%; while an all-divided White House and Congress might render a 2.08% three-month return.
The uncertainty might cause an irritable time on the market, with investors and fund managers unsure of how pivotal elections this year might further reshape the future of international trade and economic policies.
For investors, fund managers, and advisers, the scenario remains unclear, and regardless of which side of the aisle they may be sitting on, immense volatility and uncertainty are casting a fearful shadow over Wall Street.
For the time being, key players will continue to eye certain key economic indicators. For starters, the Federal Reserve's inflation-busting monetary policy may have concluded, for now at least. Experts suggest that the feds will hold rates higher for longer until they’ve achieved their 2% inflation benchmark.
In a similar vein, inflation data and job reports will play a big role again for the feds as they seek to determine their next move. Navigating the tradeoff in the months ahead would largely depend on personal investment goals and long-term outlook.
While uncertainty is perhaps at the forefront of everyone’s mind this year, perhaps advisers will consult investors to hold their position on assets that have continued to provide fruitful returns throughout last year and can hold steady against volatile economic and political turmoil.
Looking Towards 2024
This year is set to deliver a complex backdrop of critical events that will reshape equity markets, and ultimately begin to lay the foundations for a new market regime. Navigating these complexities will require key consideration and careful investigation, ensuring investment choices align with long-term financial goals and prosperity.
For advisers, these challenges might present new opportunities. This might however largely depend on how key moments will play out, both economically and politically. Investors might find themselves having to navigate a completely new set of rules, although their success will mostly depend on the ability to seize new opportunities while remaining agile and understanding market shifts on the back of an ever-changing market regime.
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