Article | The global economy in 2023 and beyond

Amid a context of unprecedented change and pervasive uncertainty, HSBC global economist James Pomeroy shines a light on the chief drivers of the UK and global economies, identifying risks and highlighting trends to help asset managers make sense of the chaos.

Beset by the gathering clouds of rising mortgage rates and energy price hikes, the UK outlook for 2023 should – by rights – look grim. Instead, to widespread surprise, the economy is showing remarkable resilience. Despite the gravity of the challenges it faces, consumer behaviour remains undimmed. Fuelled by buoyant consumer outlay – spending driven primarily by our post-lockdown need for a weekend away or a good night out – economic indicators have not fallen as precipitously as they might, leaving the UK growth outlook close to zero—flatlined, to be sure, but still some way short of apocalypse.

Chief among the downside risks to this outlook are the challenges facing the UK’s housing sector, where a shortage of homes across the UK – a shortage felt most keenly in the places where housing is needed most – casts a perennial shadow on the property market. A modest decline in property transaction volumes might be expected for 2023, but a more pronounced dip would lead to reduced spending in the consumer sectors that traditionally accompany home buying.

There are mixed and upside risks to the forecast, of course. Full employment and robust wage rates continue to underpin stability in the labour markets, though uncertainties in the macro context undoubtedly remain. Stronger economic resurgence in China, where consumer spending is recovering and property transactions are again on the rise, would bring benefits to many around the world.

Inflation, of course, is the single most influential factor in the mix. It is clear that headline inflation rates are peaking, with food and energy prices expected to soften in the coming months. Core prices have already begun to slacken: shipping rates, for instance, which increased sevenfold during the pandemic, are in sharp reverse. Look beyond the year-on-year rates dominating the headlines and we see that – once rents are stripped out – underlying inflation is quite low. Indeed, a trend towards supply-side disinflation is likely to become more marked and more visible throughout Europe in 2023.

And what of interest rates? Central banks clearly do not want to raise rates any further, but they will be extremely guarded in their approach to cutting rates this year. Supply chains may have eased, but policy committees will want to see a pronounced decline in consumer spending before they allow rates to soften, something unlikely to take place before early 2024.

Article | What Next for Alternatives?

As the fund industry continues its search for profitable growth opportunities in an increasingly challenging market context, a panel of fund managers shared their opinions on current and future trends for alternatives.

• The sustained buoyancy of the secondaries market continues to impress, with transaction volumes doubling to US$100 billion+ from the levels seen five years ago—proof, if it were ever needed, that the sense of stigma once associated with the selling of secondaries stakes has faded at last. With a wide range of trends and indicators pointing upwards – from greater market efficiency to growth in the number of specialist buyers – the market is now widely viewed in a positive light as a valuable source of liquidity. Secondaries, the panel agreed, are here to stay.
• The vaunted “retailisation” of private capital provided fertile grounds for discussion. Some democratisation of private capital seems inevitable, panellists agreed, with strong demand-side interest driven by some retail investors. Banks, too, may welcome the trend as they spot opportunity to differentiate themselves through services aimed at retail customers. Nevertheless, the complexity – and cost – involved in developing entire suites of new retail products suggest that the provider group equipped to take on the challenge may remain small.
• Fears that greater inroads by retail investors could decimate fee structures in private markets are unfounded. In contrast to the ETF markets, panellists felt, a different dynamic is at play with alternatives. New entrants will more likely take the form of high-net worth individuals and private bank clients—sophisticated, well-advised investors. Simpler models might spawn simpler fee structures but a distribution channel will remain and it will need to be remunerated.
• The growth of non-bank lending looks set to continue as banks vacate the lending space and as private funds move to fill the gap. It’s no surprise, say panellists, as market participants on both sides of the equation like much of what they see: expedited turnaround times, opportunities to add scale, significantly lower volatility than in the syndicated loan market—all in addition to the advantage of knowing your counterparty. And with non-bank lending tending to take place towards the top of the capital structure, mega-managers and large-cap borrowers will be increasingly drawn to the private credit space.
• Tax considerations are best addressed early, concludes Dechert and Mergermarket’s 2023 Global Private Equity Outlook report, which highlights the beneficial role that tax-efficient fund structures can play in the alternative space—if properly and promptly addressed.