Business Leader Magazine: Do we shut up shop on investment till times get better?

A fund manager I know well has described the investment market as “carnage”. Cost of capital is through the roof and availability is very scarce. The rest of us are seeing this in a variety of ways – start-ups are having a difficult time raising funds (certainly at the inflated valuations they have become recently used to) and more established businesses are shelving plans to invest in growth even when they can demonstrate a tried and tested business model to justify it.

Conventional Wisdom dictates that Central Banks raise interest rates whenever inflation is high or employment is at its fullest level – thus dragging inflation back to a “manageable range”. I remember how many said 12 months ago that inflation this time round was driven mostly by “supply side disruption” and not waning demand. The implication being, once we got our supply chains sorted and serviced the pent-up demand, inflation would drop dramatically. So much for that –inflation appears to be a much more dogged proposition than predicted.

Also, in the last 6 months, it has become clear that interest rates are not exactly the solution they have been in the past. The Financial Times reported the world’s 20 largest economies have raised interest rates by an average of 3.5% in the last 12 months but with no sign of inflation returning to (Fed or ECB) target levels of 2%, before 2025.

From experience it seems to take about 18 months for the impact of a rate rise to fully pass through the economy. There tend to be a few reasons for this: the global economy is now more services biased, which requires less capital (and therefore is less sensitive to the cost of capital); far fewer homeowners have variable- rate mortgages than previously (in the UK down 70% in 2011 to 10% in 2023) and labour shortages have driven wage growth and therefore, inflation.

Despite this gloom, there remains a huge amount of money looking for a home. And, we’ve all been here before. We’ve all been through down downturns, with all the pessimism that goes with it. However, there always is an up-turn. The crystal ball can only tell us when that will be. But the smart money (quite literally) is on investing now. My advice is let’s not sit on our hands for 18 months waiting for things to get demonstrably better. Get ahead of the game. Who knows if we’re now at the bottom of the trough – we’ll only know that in a few months when we look back – but a few things will have happened for sure over the next 12-18 month period: An election in the UK with a very likely change of Government.

The same fear attached to a possible Corbyn Government is not associated with a Starmer one. Parallels with Tony Blair/ Gordon Brown are being drawn (at least from a fiscal policy point of view). Who knows if this is wishful thinking, but at least a period of stability is expected.

An election in the US is also looming – and this looks to be – at least for now - more difficult to call. Some things may have happened by then: The War in Ukraine may either be over or it will be viewed as the ”new norm” The initial six months shock of the war, which spooked the markets, is a memory. Supply chains have been re-established or earlier ones circumvented. We are now in a new “business as usual”. And this signals stability, at least of sorts.

One other event will have taken place by the end of the year – COP28 in the UAE (December 2023). One key area attracting significant investment already and likely to continue at pace is sustainability initiatives designed to mitigate or control climate change. Given the large reserves available in the GCC area and the urgent need to deploy, this is likely to be a key milestone signalling the recovery of the global economy inn 2024.

If we want to look closer, there are already signs of some optimism with Global M&A deals completed during Q2 2023, up approx. 23% compared to Q1 (albeit Q1 was the slowest start to a year in a decade).

Those who make investments now – despite the apparent headwinds - or prepare now for

investment events in early 2024 are likely to be on the cusp of a recovery and benefit from the early change in sentiment. Q1 2024 is likely to be much less “carnage” than we think we are currently experiencing.