2023 Outlook – Global Cities

We ended last year (2021) by saying that inflation wasn’t transitory (non-consensus), and that history shows that printing trillions of dollars never ends well. Germany’s Weimar Republic (after the First World War) and Venezuela are two examples of how turning on the printing presses resulted in disastrous consequences. We were not filled with much optimism.

The word 'recession' seemed to be everywhere in the financial press and the narrative seemed firmly set. A group of investment strategists at Bloomberg had forecast a material decline in economic output. Gloom is infectious.

However, peering through the financial gloom into 2023, we are more optimistic.

Although all the indicators would suggest interest rates will rise, the rate of the increase will slow. This is the critical point. Price rises are slowing down as demand is being squeezed out of the system. Inflation will plateau. Pricing of equities, given certain valuations, becomes a free option on rate increases moderating.

There are also two structural points we think will work in favour of equity markets next year.  

The first is that investors still have a lot of cash. Quantitative easing swamped the market with liquidity and not even events such as the collapse FTX, the cryptocurrency exchange and hedge fund, has put paid to this. 

The second is that employment remains robust. In the US, there are 1.7 jobs for every person without a job. Demographic trends mean that more people are retiring than being born in developed markets. Workers are needed to support the older population. This is structural, in favour of employment.

So, our argument hinges on the fact that employment is not robust enough to be inflationary but is robust enough to prevent a recession. Time will soon tell if this is correct.

If it is correct, then the path from here is shallow and the economic landing soft

Fund performance 2023

We think performance in 2023 will be positive. Companies we invest in are quasi-monopolistic, owning assets in the best cities and best subsectors in the world.

For investee companies in the portfolio, new supply is non-existent, occupancy levels high, balance sheets have low debt levels and well-laddered maturities. This gives them pricing power at the top line and the potential to expand margins should rates continue to moderate.

The sour taste of rapid rate rises should not have the same impact as in 2022. As ever, progress will not be linear in financial markets, but we cleave to companies insulated by assets in great markets and fortress balance sheets. These companies will, we believe, provide resilient performance even when markets take a nasty turn.