Global Investment Trends in a Worldwide Economic Recession

Everywhere you look these days, there are ominous signs that the global economy is taking a beating. Whether it’s the war in Ukraine, rampant inflation, instability in the energy markets, essential employees on strike, or continuing issues with the supply chain, the global economy is currently facing severe headwinds.

According to the United Nations Conference on Trade and Development (UNCTAD)’s latest report, global foreign direct investment (FDI) in the second quarter of this year is down 31% from the previous quarter and is 7% below last year’s average.

In addition, UNCTAD warned that multilateral investments in climate change mitigation and renewable sources of energy are going to continue to decline in 2022. Furthermore, almost all the funds (94%) in combating climate change are directed towards mitigation projects rather than adaptation projects.

According to the 2022 Natixis Institutional Investor Outlook survey, 73% of respondents predict further increases in interest rates from central banks, 75% expect an increase in volatility in the stock market, 63% predict more volatility in bonds, and 56% of respondents expect volatility in currencies to continue.

Expert Predictions

Despite the gloomy outlook for the global economy, a few bright spots have emerged.

According to Morgan Stanley, next year is predicted to be a good year for income investing. Andrew Sheets, the Chief Cross-Asset Strategist for Morgan Stanley Research, predicts that central banks will pause their rate hikes, making high-quality bonds (e.g. German Bunds, Italian Government bonds and U.S. Treasuries) an attractive market for investors next year.

In addition, Morgan Stanley predicts that oil will outperform gold and copper (with a prediction that Brent crude will hit $110 a barrel by the end of 2023) and that the best yields can be found in emerging markets. According to Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for the company, valuations in emerging markets are “clearly cheap” and that slowing inflation will boost the economies of these countries far more quickly than in more mature markets.

Morgan Stanley has a rosy forecast for Japan where low valuations and “idiosyncratic tailwinds” will result in 11% gains for the Tokyo Stock Price Index next year. Lastly, the investment bank predicts that stocks in weapons manufacturers will continue to boom as arsenals in NATO member countries continue to be depleted.

According to Blackrock’s investment outlook for the year ahead, some of the best returns will be found in bonds as yields are predicted to increase. In particular, Blackrock recommends short-term government bonds, investment-grade credit, and agency mortgage-backed securities while avoiding long-term government bonds. Furthermore, due to the risk of continuing inflation, Blackrock recommends keeping inflation-linked bonds on both the “tactical and strategic” horizons for investors.

According to Forbes, investors are recommended to stick to Treasury Inflation Protected Securities (TIPS) and other forms of inflation-linked bonds. Other recommendations for investors by Forbes include increasing the diversity of portfolios as well as identifying low-cost exchange-traded funds (ETFs) and mutual funds. Uniquely, Forbes also recommends investing in Series I savings bonds, which hit a historic high of 9.62% yields this year.

According to Bankrate, the best long-term investments available right now are real estate (including real estate investment trusts or REIT), the stock market, and savings accounts and certificate of deposits (CDs) at banks - despite inflationary pressure. Bankrate also joins other companies in recommending bonds as the long-term decline in interest rates has been acting as a tailwind for bond investors.

All in all, most financial advisors are warning investors to expect continuing volatility and instability in the global economy, affecting many of the market segments that have traditionally yielded the best returns, leaving bonds as the universal favorite for both short and medium-term investments. Nonetheless, the possibility of inflation rates stabilizing combined with a pause on interest rate hikes by central banks offer the promise of a far healthier global economy next year and greater choices for investors.