Many play fortune teller at the start of the year - my making vision boards, setting goals, or voicing their predictions. In particular, many are placing investors and fund managers are placing bets and making predictions on the macroeconomic environment that is to come in 2023 and what we can expect.
While views and predictions vary, they primarily fall within a few key headline themes: inflation / interest rates, housing market / commercial real estate, tech valuations, artificial intelligence, and Russia's war in Ukraine.
Below is an aggregated consensus shared among investors, entrepreneurs, economists, and politicians on each theme:
Inflation & Interest Rates
The Federal Reserve (Fed) took on an aggressive tightening monetary to reign in rampant inflation, which sits at 6.5% as of December 2022 (a far cry from the Fed's long-term inflation rate of 2%. The Fed increased interest rates several times throughout, with the latest raise during its December FOMC meeting to a target range of 4.25% - 4.5%. December employment and PCE reports showed that the economy was softening which spurred a stock market rally amid optimism that the Fed might be reaching the end of its rate hikes.
Despite this, the committee issued a statement that it will continue its tightening policy for the foreseeable future: "The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time".
According to Amundi Asset Management, this will create opportunities in certain sectors of the economy, "Given decelerating global growth and a profit recession in the first half of 2023, investors should remain defensive for now with gold and investment-grade credit the favored asset classes. However, they should be ready to adjust through the year to exploit market opportunities that will emerge, as valuations get more attractive. Headwinds should subside in the second half of 2023."
Housing Market & Commercial Real Estate (CRE)
Interest rates have a direct impact on i) stock market performance ii) attractiveness of equity alternatives such as bonds and other fixed income, and iii) home and commercial real estate mortgages and prices.
Mortgage rates are showing first signs of retreat, sitting at 6.33% as of January 12, 2023, down from 6.97% peak in October 27th, 2022. For comparison, mortgage rates reached 6.78% right before the Great Financial Crisis of 2008.
Melissa Cohn, vice president for William Raveis, a real estate brokerage firm, noted "I think that we can expect mortgage rates to go down another quarter or even as much as a half a percent over the course of the next month...People can't expect that we're going to go back to a 3%, 30-year fixed rate...If we can get interest rates to go back to where they were pre-COVID, call that anywhere from 3.75% to 4.5%, that would be a home run".
AI & Chat GPT
Chat GPT, the language prediction model chatbot launched in November 2022 by Open AI, has been all the rage. Its use cases range from automating work emails to writing a novel / college essay to developing an app. This doesn't even begin to cover all of its capabilities. It's not magic - its simply the result of vast amounts of data that is used to train the AI to make predictions and provide a result.
Chat GPT is already being used in professional settings such as healthcare, journalism, and software development. However, the results are still fraught with error and raise potential ethical concerns (specifically within healthcare use cases).
Oren Etzioni, adviser and board member of the Allen Institute for Artificial Intelligence predicts that " within six months or so, we're going to see a huge step-up in the conversational capabilities of chatbots and voice assistants".
Take education for instance. Many schools and higher education institutions fear that students will no longer write essays or homework assignments on their own. Instead, chat GPT will do all the work. New York Department of Education, for example, has taken steps to block access to ChatGPT on networked school devices.
Tech Valuations & Software Stocks
Company valuations, specifically software businesses, have been on a sharp decline since their COVID peaks. Data from Morgan Stanley
According to renowned investor Howard Marks, co-founder of Oaktree Capital Management, "...a significant portion of all the money investors made over this period resulted from the tailwind generated by the massive drop in interest rates. I consider it nearly impossible to overstate the influence of declining interest rates over the last four decades."
Gone are the days of cheap money. Tech companies that grew rapidly during COVID and hired excessively to support newfound demand are now implementing rif's and laying off thousands of employees (in some cases). There is a silver lining in this - declining software stocks present a buying opportunity for private equity investors who are sitting on tons of dry capital that is ready to be deployed.
This reset of software valuations will force many CEO's to rethink their approach to "growth at all cost" mentality. This time period will also instill discipline into venture capital investors who previously chased high growth / high cash burn companies to focus on companies with sound fundamentals and high free cash flow.
Russia's War in Ukraine
Since the start of the war in Ukraine, the country has suffered incredible tragedies' and loss of life. While not comparable, the impact of the war has been felt beyond the borders of Ukraine. European countries have been hit with record high food prices (as supply of grains from Ukraine is virtually non-existent) and gas prices (as Europe looks to move away from dependence on Russian oil and gas). Global wheat prices alone increased by over 60% from February 2022 to June 2022. As such, many are betting on the commodity sector (this includes food and water, gold and silver, as well as rare earth metals).