2023 and Beyond – A Challenging Environment but Opportunities Remain

War in Ukraine, inflation, energy prices, interest rate hikes, the aftermath of China’s zero-covid policy,  and supply disruptions have joined rank with monetary tightening. In 2022, global markets entered into a low-growth, low-return environment.

Growth in emerging economies is expected to decrease with 50 per cent. As these markets have entered  into bear territory, their outlook remains tied to global economic stagflation, and to central banks in  developed countries being able to bring inflation under control without engineering a recession.  Increased geopolitical risk puts further constraints on economic growth in emerging economies.

When global markets are showing low growth and low returns, income-producing assets become superior to capital appreciation. With emerging economies’ fundamentals in a relatively solid position,  carefully selected investment opportunities continue to offer attractive relative growth as well as income.

2023 and Beyond

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Data Matter More Than Stories

There exists a trend amongst investors to seek exposure to “headline” themes relating to the impact of  emerging industries and economies. Examples are “India’s middle class is extending”, “neural networks  overtaking process manufacturing”, or “Africa, the fastest growing tourism destination”.

Although stories may become reality in the long run, they lack predictive power for asset returns.  Investors can miss out on the larger, more opaque risks associated with various stages of the economic cycle and asset classes they focus on. Portfolio companies may project growth above trend, and extrapolate on the higher trajectory. Experience learns that most of these cycles and asset classes  eventually revert to their median level of growth.

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