If you thought that the last couple of years has been tough, then in the words of the famous 1974 Bachman-Turner Overdrive hit song…. You Ain’t Seen Nothin’ Yet.
To say that 2023 will be difficult might be a massive understatement. Our encounter with COVID could be a cakewalk compared to what we might face next year. Problem is that whilst we have bounced back from the pandemic, it is hard to see where economic growth could come from.
Consider consumer spending, which is normally the biggest driver of economic expansion. Where on earth are consumers going to find the money to spend when high interest rates and inflationary pressures could stretch household budgets to breaking point? For now, many households still have some savings to fall back on. But the rainy-day fund won’t last forever.
Next consider private-sector investments. If you haven’t already noticed, many companies have gone into belt-tightening mode. They are cutting budgets, cutting investments, and cutting staff. Three cuts that could mean a reduction in private-sector spending.
What about government spending, which has always been a favourite for proponents of Keynesian economics. Well, good luck with that. Of the world’s ten largest economies, five have debt-to-GDP levels in excess of 100%; three are within touching distance of 100%, and only two are below.
Of those two, China says its debt-to-GDP is around 70%. Make of that what you want. Point is, many governments are already up to their eyeballs in debt. They could try and borrow more. But who is going to lend to them?
Finally, we have net exports as a fourth driver of economic growth. Good luck with that one, too. The trade war between the US and China could put paid to any hopes that a revival in exports could drive economic growth.
So, what should investors do? It’s quite simple. Not all businesses will feel the pain of an economic downturn. Some might even do quite well. Banks, for instance, could have a field day with high interest rates. They have been waiting a very long time for this day to arrive.
Insurers are cash rich. They sit on a pile of money called a float that is invested in bonds. They should be able to reinvest those bonds when they mature into new fixed-interest instruments at a considerably higher return.
Consumer staples should do well, too, especially those with pricing power. They make things that people can easily afford. Pharmaceuticals could enjoy a second wind. They make things that people can’t easily do without.
If you are cash rich, then it shouldn’t be too difficult to get a return on your money in 2023. But spare a thought for those who are less fortunate. Be kind. Be generous. Be considerate.
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