Investment Outlook from LGPS Central Across a Range of Asset Classes for 2023.
With a wealth of investment expertise at LGPS Central, it’s always enlightening to hear the collective perspectives of our team on what the future may hold.
As we move into 2023 everyone at LGPS Central remains committed to doing their upmost to deliver on behalf of our Partner Funds.
ACTIVE EQUITY
2022: Investors allocated record amounts to cash, markets become overvalued 2023: Global recession forecast to occur due to inflation/rates hikes; bearish stance warranted in first half of year; look to buy laggard stocks in second half US Equities: Strongest returns could be seen in value and small cap companies as year develops Chinese Equities: Should see positive contribution due to reopening of economy US Dollar: Weakening will be good news for Emerging Markets.
FIXED INCOME
Investors have the potential to benefit from high quality bonds at yields not seen in more than a decade. Although interest rates are expected to continue rising in the short term, the pace of these increases is expected to slow down. Investment Managers are cautiously increasing their duration positioning against benchmarks in anticipation of this slowdown. Credit quality is paramount, and managers are focusing on higher rated debt.
PASSIVE EQUITY
Sustainability was the dominant theme in 2022 and this trend is expected to continue in 2023 as institutional investors take steps towards realising their net zero ambitions. Indices focused on reducing biodiversity loss are currently in their infancy but may gain traction in the wake of COP15, while new indices focused on companies engaged in the hydrogen economy may also become attractive to investors given the recent energy crisis.
PRIVATE EQUITY
PE activity should remain steady, albeit below recent levels. Debt is expected to be used less with greater equity stakes in new investments. PE fundraising will take longer, and investment pace will be more disciplined. Exits to other PE firms will be less frequent, with trade buyers taking advantage of lower competition from PE to acquire higher-quality assets. Regulatory intervention is expected where retail investors may have to wait to invest in PE. Persistence of returns for top performing managers is expected, and ‘take privates’ will continue to see elevated activity. Companies that have been surviving on cheap money may be tested in the higher-interest rate environment.
PRIVATE CREDIT
Private credit funds continue to offer reliable and consistent investment opportunities. Traditional banks are scaling back on lending in the middle market, leading to more penetration from private credit funds. Even in the larger syndication market, liquidity has all but dried up, leading to better pricing and better terms for private credit lenders. In the current market environment, investors can expect higher base rates, broader credit spreads, tighter EBITDA definitions, and more lender friendly documentation. This should result in higher safety for lenders and improved risk/reward dynamics.
INFRASTRUCTURE
Infrastructure will continue to be an attractive asset class in 2023, with governments and investors turning to it to revitalise their economies and achieve attractive returns. Decarbonisation, energy security and digitalisation will be major trends in the year and there will ongoing investing in renewable energy, transport, water and social infrastructure to decarbonise, meet net zero targets and deploy the record amounts of capital raised in 2022. Smart cities, outdoor media and the Internet of Things are also expected to draw investment as these technologies become more proven and display the underlying characteristics of Infrastructure.
PROPERTY
In 2023, UK property is likely to fall in value, followed by a slow recovery. There will be heightened levels of ‘gated’ funds due to retail investors withdrawing their money, however, institutional investors will bring some stability. The outlook for rental growth is uncertain as the Retail, Industrial and Office sectors are changing. Overseas property markets may also see declines in the short and mid-terms. Property investors should look out for opportunities to buy value and to take advantage of the changes in the market.
MULTI ASSET STRATEGIES
Those who believe that markets act rationally in the short-term should be wary. Investment strategies that are not highly linked to mainstream asset markets, such as insurance linked assets, could be a good place to start. Holding some cash while the markets find equilibrium seems sensible.
DISCLAIMER: This document has been produced by LGPS Central Limited and is intended solely for information purposes. Any opinions, forecasts or estimates herein constitute a judgement, as at the date of this report, that is subject to change without notice. It does not constitute an offer or an invitation by or on behalf of LGPS Central Limited to any person to buy or sell any security. Any reference to past performance is not a guide to the future.
