Global stock markets received news of reduced forecasts for economic growth in a predictable manner today, falling as investors considered what weaker revenue growth will mean for profits.
The International Monetary Fund (IMF) has reduced its projection for 2022 global GDP growth from 3.6% in April to 3.2%. A continued slowdown next year will see 2.9% growth in 2023.
Traditionally, global growth over 4% would trigger inflation fears, the thinking being that demand growth will outpace the supply of goods and services. Conversely, growth below 3% would trigger talk of recession and deflation.
But we are in ‘a mixed up, muddled up, shook up world’ to quote The Kinks’ 1970 hit ‘Lola’. The IMF accompanied its warnings of weaker growth with warnings of still rising inflation.
We are looking at a stagflation problem, which investors have not had to face since the 1970s and early 1980s, and that will affect corporate sectors differently.
Companies that can pass on higher energy, materials, and labour costs will be able to protect their profit margins. These will perhaps include consumer staples, utilities, energy and mining companies, and those luxury goods companies whose clients are price insensitive. We should not forget the suppliers to these industries.
Real estate has, traditionally, also offered investors protection from inflation. Though post-Covid, selecting the right type of property is key.
But two types of companies look vulnerable to the mix of weak growth and high inflation. The first is science-based companies, such as tech. These will be hurt by the move away from discretionary spending, as real incomes fall because of inflation. Young, growing tech companies will in addition be hurt by the rising cost of capital as interest rates rise.
The second is business and consumer discretionary goods and services, whether travel and leisure, autos, or consumer electronics.
By region, we can expect professional investors to shift their biases away from tech and tech-heavy indices, such as the NASDAQ, and into more defensive stock markets, such as the blue-chip FTSE100.
The downgrade for U.S GDP growth this year is particularly severe, from 3.7% to 2.3%, while the U.K has fallen from 3.7% to 3.2. But the UK is forecasted to have the weakest growth in 2023 of the G7 countries, at 0.5%. This suggests that top-line revenue growth for U.K-focused companies (i.e., mid and small-cap stocks) may be particularly hard to find.
Investors are recommended to remain broadly diversified by sector, geography, asset class and currency in their portfolio.
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