Macro outlook for 2023 and beyond part two

In a more challenged economic environment, US private placement (USPP) investors say the value of industry and issuer selection will be greater than ever, as will robust structural protection in deals.

SWISS What are investors’ economic outlooks for 2023?

GLEASON At Nationwide, we believe there will be a recession in the US. The issues are the timing and depth of the recession – we think it will happen either late this year or early next.

We have a slightly more bearish view than Tom Joyce’s (see box on p28) in that we think the recession will be a little deeper. We think that even if we avoid a technical recession, we will still feel the economic pain as if we were in one. On the bright side, we think Australia will skip by without going into recession. We are pretty optimistic about Australia’s outlook.

HALLIDAY The Voya Investment Management house view is also that we are going into a cyclical downturn. I won’t opine on how deep or wide it will be, but our expectation on the credit side is that we have to brace ourselves for things to slow down and for companies to start being stressed.

We are renewing our focus on structural protections and the covenant packages we expect to see in the deals we look at. This is for new production but also for existing names, to make sure we are aware of the stress points.

We expect there to be stress points in the portfolio. But, in general, we are confident the portfolio is well positioned. One of the attractions of the USPP market is the covenant protections and structural enhancements found in our transactions. We think this will bode well for us in the coming downturn. 

Covenants and other structural features provide important downside protection when the market is going into a downturn, so they are a focus for us.

We are equally focused on finding the right sectors to invest in. Our portfolio and the USPP market overall have generally had very strong credit performance in past recessions. We find good companies – like those here today – that have performed well in downturns and we look for ways we can support them. Sector selection is just as important to us as covenant protection.

SWISS Which sectors are standing out to USPP investors right now?

PATTISON We have been heavily involved in transportation assets, and have been very pleased with how they performed through COVID-19 and how they have come out of it.

Utilities and other regulated assets generally demonstrate defensive characteristics as well, and have seen support from the private market during downturns.

A sector that is interesting with this particular recession is real estate. Many would traditionally view this as a defensive sector but there are some specific things going on that might make it less so.

SPAETH I’d be interested to hear Tom Joyce’s views on sectors to look out for. Are there some that will perform worse or are there certain nations that will do better or suffer significantly more?

JOYCE Geographically, we are bullish on India and south-east Asia generally. I spent a lot of time in that region in the last year, as well as over the last 25 years. We think India is poised to drive the highest growth rate in the G20 in 2023.

China may have a worse Q1 and a better rest of the year than people think. China’s consumers comprise almost 50 per cent of GDP and they have been pretty tepid throughout the entire COVID-19 period. We have blueprints for re-openings – South Korea, Japan, the US, India – but we have to be a little careful overlaying this blueprint on the Chinese consumer. Having said this, the base case is a surging consumer.

Vis-à-vis what we thought three or four months ago, Germany could be one of those countries that does better. Europe on aggregate is 20 per cent above expectations on gas storage due to the mild winter and Germany has got the LNG ports up and built faster than we would have guessed. Having said this, Germany is still more exposed – as is Italy – than many countries in Europe.

The UK has done a nice job of holding its position as Europe’s worst-performing economy. It has some structural challenges: it doesn’t depend as much on natural gas as other countries but it also has much less natural gas storage infrastructure, and it also has some of the larger challenges relating to labour shortages. This has been complicated by Brexit. It is unlikely that the UK will side-step recession.

From an industry perspective, I favour defensives over growth sectors. There is more pain to come in the tech arena. The story we need to be more focused on in 2023, where there could be downside, is earnings. Corporate earnings have more downward revisions to come.

The market has priced in a lot of things, but I don’t think it has priced in the magnitude of the earnings downturn we are likely to see in aggregate. A lot of earnings revisions have already come out over the last three months but we believe there is still a fair bit more to go in this respect.

Earnings are very highly correlated with nominal GDP, which is coming down pretty quickly – for two reasons. One, because growth is slowing and, two, because inflation is coming down a lot. The part of inflation that will be a little stickier than others is wage inflation – and this is a multiyear problem.

My view on the return of inflation to 2 per cent is that it will be a long ride. It will take one or two years, not six months. Inflation break-evens are pricing that we could be there by mid-year but I think this is highly unlikely. It will be a bumpy ride. The improvement is disinflation, which is well under way, but it is not likely to be smooth and linear.

The area that is likely to be less smooth and linear is wage inflation. This will put pressure on corporate margins as revenue comes down at the same time. This has a knock-on effect for credit. This is more of a 2024 issue than one that will play out heavily in 2023. The maturity walls are still fairly manageable in 2023 but they get a little more challenging next year.


Our expectation on the credit side is that we have to brace ourselves for things to slow down and for companies to start being stressed. We are renewing our focus on structural protections and the covenant packages we expect to see in the deals we look at.