Executive summary
Economic outlook. Inflation is likely to fall over the next 12 months as supply chains normalise, commodity markets realign, and aggregate demand softens. But, in our view, inflation is unlikely to fall back to central bank targets quickly. Recessions are likely for the world’s major developed world (DW) economies in 2023. The UK and Euro area are probably already in recession and the US will probably join them in 1H23. But these downturns are likely to be mild by recent historical standards and we expect recoveries in 2H23. With China’s economy set to steadily accelerate all year, the global economic landscape is likely to improve significantly in the second half of the year.
Structural change and implications for investors. In addition to the cyclical dynamics, we believe there has also been a structural shift in supply-side growth for the global economy. Understanding this dynamic and its implications is critical to successful asset allocation, in our view. This new world is likely to be characterised by higher and stickier inflation, higher interest rates, shorter economic cycles, and less policy support at critical economic junctures. In such a world, investors are likely to be chasing investments that are defensive, have a stable yield profile, and offer inflation protection. Many real assets have these attractive traits.
Real estate. Cyclical downturns often present opportunities for new investments, such as acquiring assets at higher capitalisation rates (“cap rates”) alongside equity and debt recapitalisations as credit conditions tighten. Opportunities also appear to have emerged in public debt and equity markets, particularly in sectors and markets with solid long-term fundamentals. In general, high-quality buildings with strong cash flows and premium tenants, and assets in locations where there are supplydemand imbalances, should perform solidly through the cycle. Higher replacement costs – driven by elevated construction prices – may also help protect pricing, or at least provide a floor for prime valuations. In other sectors and locations, higher construction and financing costs are creating opportunities to acquire development sites at discounted prices with less competition from highly levered investors.
Infrastructure equity. Infrastructure is relatively well placed in 2023 due to its ability to pass through inflation, the essential nature of the services it provides, and the presence of regulated or long-term contracted cash flows. Higher-thanaverage inflation could be particularly beneficial for core and core plus infrastructure assets given that for many of these assets the link between returns and inflation is tighter than for those higher up the risk spectrum. Consistent with other periods of economic slowdown, we may see traditional merger and acquisition activity soften as price expectation gaps emerge between sellers and buyers. That said, we anticipate increased activity across all energy transition sectors, including the build-out of core renewable generation as well as new opportunities in areas such as battery storage and green hydrogen.
Infrastructure debt. On the infrastructure debt side, higher interest rates have made the asset class more attractive. Credit spreads also started to widen in 2H22, which we expect to continue in 2023. In the sub-investment-grade market credit spread increases have occurred faster and been larger than in investment grade markets. At the same time, infrastructure debt opportunities may decline as infrastructure assets hold off raising financing and/or focus on shorter-tenor debt.
Agriculture. Agriculture’s stable return profile and inflation hedge characteristics make it a relatively attractive place to be in the current macroeconomic environment. Within the sector, margin management will continue to be key to better-than-average performance. Large, professionally managed farms are arguably well positioned in this regard due to their scale benefits, professional management teams, input purchasing power, and ability to deploy productivity enhancing capital and technology.
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IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
The views expressed represent the investment team’s assessment as of the date indicated and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.
Past performance does not guarantee future results.
Macquarie Asset Management (MAM) is the asset management division of Macquarie Group. MAM is a full-service asset manager offering a diverse range of products across public and private markets including fixed income, equities, multi-asset solutions, private credit, infrastructure, renewables, natural assets, real estate, and asset finance. The Public Investments business is a part of MAM and includes the following investment advisers: Macquarie Investment Management Business Trust (MIMBT), Macquarie Funds Management Hong Kong Limited, Macquarie Investment Management Austria Kapitalanlage AG, Macquarie Investment Management Global Limited, Macquarie Investment Management Europe Limited, and Macquarie Investment Management Europe S.A.
Other than Macquarie Bank Limited (MBL), none of the entities noted in this document are authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.
(2940155 – 6/23)
