The Changed World of 2022

2022 has been quite an unanticipated and eventful year with the Russia-Ukraine war disrupting the global Covid-19 recovery. The way we look at interest rates and linked investment securities, real estate, investing, basically almost everything has changed dramatically since the start of 2022. As we come closer to the end of the year, it is interesting to analyse the movements in some of these topics and what the market is expecting 2023 to look like. Let us start with the most obvious one – interest rates!

Interest rates, once negative in most developed economies, have all increased with the countries adopting quantitative tightening as opposed to often heard, quantitative easing. Prolonged period of low / negative interest rates have wired the public to believe that a higher interest is bad for the economy. However, economies having a high interest rate is not an unknown concept. It is true that post 2008 financial crisis, quantitative easing was necessary. But, one must understand that quantitative ’easing’ as well as quantitative ‘tightening’ have to be theoretically implemented on a temporary basis while a balanced figure between two should be ideally maintained otherwise. That did not happen because of market reluctance and inability to handle change. The moment things started looking good, Covid hit and more easing (instead of ideally tightening) was necessary. Cut to today, it has now been a high time that rates are tightened to bring them to a balanced level resetting the economy. This reset is required to reset the economic cycle. In order to reset, a downward trend is required in the economy (which we call a recession). Hence, instead of resisting, it is best to adapt to it.

Then let’s talk about real estate. The once booming market has now shaken due to high interest rates and recessionary fears. The real estate sector is driven by demand and supply. Over the last decade, the demand for houses has increased rapidly and supply was falling short of the rising demand, sending the housing prices up drastically. With the pandemic, the demand for houses away from the major cities also increased because of remote working concept. However, now with rising interest rates, mortgage loans have become expensive and hence, demand is diminishing. Hence, housing prices have fallen in the last 2-3 months across all major economies in the world. It is important to note here that unemployment is low too and therefore, people’s ability to repay mortgage loans even with a high interest is high. So, the concern is how low can the real estate prices go? There cannot be a drastic fall because people can still afford the prices, but they will just not bid hundreds of thousands of dollars above the ask price. Hence, after having fallen to a certain point, there will be rise in demand again leading to stabilising real estate prices. What will this exact point be varies from country to country and even by type of real estate. Hence, it is a wait and watch.

With stressed economic conditions, come opportunities for private equity investments. While this may be true, the challenge is high interest rates this time. Low interest rates helped some private equity firms to go for buy-out transactions because debt was cheap. Now, debt is not cheap. Another thing is, the valuations of private companies is taken from comparable public companies. With the public markets having fallen and being highly volatile, the challenge to private equity players is to (1) decide on one valuation to buy a target and hope it is the right one that then generates a return rather than falling in value even further, and (2) evaluate the valuations of existing portfolio companies and in many cases mark-down the valuations (which affects their returns and hence their fees) to the current public market dynamics. Hence, even though private equity firms across the world have enough dry powder and also an opportunity in this stressed time, the challenges are higher than before. A cautious approach with no or low debt seems the best solution at this point but one can never say this with 100% certainty.

2022 has been quite an eventful year for the crypto markets. This high risk market is filled with all different kinds of securities traded by millions. The fiasco of a stable coin Luna explained in the previous article and now FTX! As far as I understand these events, the common problem seems to be the lack of enough backing for the worst case scenario where major chunk of your investors / customers withdraw their funds from your product. They play on leverage, similar to derivatives on our regular stock market, with the only difference being that the leverage in cryptos is way higher and quite under-regulated compared to the derivates in the stock markets. And this rightly so because the whole point of crypto is to be decentralised and so less regulated. However, is it sustainable? If this is going to be the case then as investors, we must take a step and invest cautiously in exchanges and providers which disclose enough back-up for worst case scenarios just to safeguard our interest. And also understand this is a high risk market so invest only that amount which you are comfortable letting go in case of a failures like Luna and FTX. Cryptos are not bad, high risk and hence, high chance of failure is just an integral part of the core concept of cryptos, including stable coins to some extent.

The consequences of the Ukraine war on energy and food supply has deviated global economies from climate change initiatives. Plans of re-investment in coal by some nations is a living proof while there are options to go for a little expensive but long-term beneficial renewable energy sources. The weapons used in the war itself have added to greenhouse gas emissions in the world. At this rate, saving our planet from natural disasters in the near future will be difficult and mass migrations will add to the stresses of the world. The war could be seen as an opportunity to adopt greener alternatives of growing food and energy. Only time can show how much world economies accept it.

So many other sectors have been majorly impacted this year – supply chain, tech, etc.

As retail investors, these and many more changes in the world change the normal course of evaluating investment opportunities. Today for example, tech investments, which were booming during Covid, are stressed. So, as I always say, diversification is necessary. But today I think diversification not just in terms of sectors but also in terms of countries is important. UK is more stressed than US for example. If one has invested in both, the portfolio will be quite balanced. Hence, we can try to look for mutual funds giving access to most markets in order to balance. And then look for riskier opportunities to play with extra earnings.

The current times are tight and stressed. High inflation, high taxes, high interest rates are all taking a toll on local public because their spending power is being taken away. Most analysts expect 2023 to be a recession which will be a difficult time for new job seekers and also people looking to buy new houses or incur a similar large expense say on higher education. To those who are worrying, here is a small message. Know that economies always move in cycles. Good times followed by bad and bad times followed by good. This is a temporary phase. When planning your future goals, 2023 may be a speed breaker but 2024/25 will be a recovery one when jobs will revive, buying power will slowly be increasing, etc. So, have patience, brace for 2023 by saving a little more, and making more investments and enjoy the fruits thereafter.

Disclaimer: This article is in no way a recommendation to buy or sell any instrument whatsoever for anyone. This is just an opinion and an individual, independent analysis aimed at making the audience think about crucial questions today. Always make your investing decisions through an expert and through your personal research.