A shallow recession is coming, but don’t fear it: Davos panellists

[DAVOS] THE widely expected global recession in 2023 will affect some countries, sectors and companies more than others, creating opportunities for entrepreneurs and investors, said a panel of experts at the World Economic Forum 2023 in Davos on Tuesday (Jan 17).

Countries and companies that are able to adjust to a shifting global supply chain, and innovate and take advantage of new demands in the energy and healthcare spaces, will be particular beneficiaries.

Douglas Peterson, president and chief executive of market intelligence provider S&P Global, said indicators point to a “very mild” recession in the first half in the United States, Europe and the United Kingdom. At the same time, there should be strong growth in most parts of Asia. “Net-net”, he said, that should mean a shallow overall recession for the world.

This recession shouldn’t be feared, however. The slower growth is part of a positive rebalancing of global economies and supply chains.

“I really believe we will see a reconfiguration of the economy, of economic growth patterns; and that is the real topic, rather than the shorter-term impact of this year,” said Axel Lehmann, chairman of Swiss bank Credit Suisse.

Mario Centeno, governor of the central bank of Portugal, described this reconfiguration as an opportunity to redesign globalisation. “I really hope that this time we can make it in a more inclusive way,” Centeno said. “I would rather prefer to see growth spread across the globe.”

Much of 2023’s global economic growth is likely to be driven by China, as the country rolls back measures introduced to curb the spread of Covid-19.

Laura Cha, chairman of stock exchange operator Hong Kong Exchanges and Clearing (HKEX), said investors can look forward to a pick-up in China’s manufacturing sector.

“The bright spot in China is really the innovation part: in technology, in healthcare,” Cha said. Over the last three to four years, she added, Hong Kong’s stock exchange has become the second-largest fundraising centre in the world for healthcare companies. Many of these are mainland companies, and have seen strong interest from investors.

Credit Suisse’s Lehmann, too, said many of the bank’s clients are looking for new places to put their money. “The smartest people are looking for opportunities.”

They are likely to find these opportunities by looking past headline numbers, and disaggregating the data to figure out where growth is continuing or even picking up.

“In situations like that, innovation is so key,” Lehmann said. “There are certainly sectors where you can grow, or even outgrow. Energy, healthcare, and others. It’s a time for true entrepreneurs these days.”

S&P’s Peterson highlighted the transition of the global energy system as another interesting opportunity. This could include battery technologies and energy grid systems.

Another big theme is the shifting of global supply chains. In the US, for instance, Peterson noted a government incentive to develop a domestic semiconductor industry.

Semiconductor investments, as well as the energy transition, would likely create demand for skilled labour that is unavailable in the US labour market. “We could see the need for a much more comprehensive immigration reform,” he said.

Key risks investors should watch for in 2023 would come from the corporate credit market as well as geopolitics.

“Over the last 10 years, there’s been a lot of issuance of high-yield debt in the corporate sector,” Peterson said. With interest rates much higher now, some companies that need to refinance their debt may struggle – particularly those operating in industries that will be negatively affected by the recession.

“Is there some sort of debt bubble in some parts of the economies? That would be one of my question marks,” he added.

As for geopolitical instability, HKEX’s Cha noted that investors can do little more than navigate very carefully. “For the markets, for corporates, it is something we have to learn to live with.”