| MVergan Deldona, research director of Global X |
After a tumultuous year in the capital markets, 2022 ends with smaller geopolitical risks, a weaker dollar and lower commodity prices.
In 2023, investors face a different macroeconomic landscape, characterized by forecasts for lower but longer increases in interest rates by the central banks, a weakening of the dollar and a slowdown in global growth, except in China, where a recovery may occur.
This month we are in the company Global X The important trends of the year in the various fields are reviewed and the investment opportunities for the coming year are explored, towards a possible return of the markets to a certain normality.
| Thematic overview of the hedge fund market in 2022: recovery in the field of financing to deal with climate change
The broadest layer of the thematic classification system of Global Xthe category layer, includes three basic factors of disruption: exponential technological progress (“disruptive technology”), changing consumption habits and demographics (“people and demographics”) and a changing physical environment (“physical environment”).
Until November 30, 2022, there were 126 thematic ETFs on the market UCITS which amounted to approximately 33 billion dollars in managed assets (AUM)an amount that represents a 19% decrease compared to $41 billion in December 2021. Thematic assets under management in the physical environment category increased by 32%, following a 31% decrease in the disruptive technology category and a 52% decrease in the people and demographics category.
The net inflow of funds in the thematic basket funds UCITS amounted to $1.23 billion, while the net outflow of funds in US thematic hedge funds amounted to $3.83 billion. The two leading super-issues in terms of net inflow of funds in 2022 were issues related to climate change ($977 million) and big data (278 million dollar).
Climate change ($1.53 billion), big data ($714 million) and infrastructure development ($87 million) were the topics that dominated the net inflow of funds in thematic hedge funds UCITS this year Healthcare ($327 million), robotics ($291 million) and new consumers ($201 million) recorded the largest net outflow of funds.
Conversely, in US thematic hedge funds, the leading areas in net outflows were robotics ($1 billion), mobility ($791 million) and climate change ($556 million), while disruptive materials hedge funds recorded the lowest outflow the most ($60 million).
| Difficulties in growth stocks
Inflation in 2022 climbed rapidly in all regions following the sharp recovery from the Corona epidemic and high commodity prices as a result of Russia’s invasion of Ukraine. Central banks around the world, led by the US Federal Reserve, responded to inflation by aggressively raising interest rates, which in turn challenged interest rate-sensitive growth stocks throughout most of the year.
The largest net outflow of funds came from technology-intensive fields: first, robotics and computing ($1.23 billion), followed by autonomous and electric vehicles ($643 million) and medical innovation ($630 million).
This trend did not apply to the cyber security sector, which enjoyed a strong net inflow of $1.67 billion, both inUCITS and in the thematic hedge funds in the USA. The need for data and the protection of critical infrastructures increases in 2022 due to the increase in the global risks of cyber attacks against the background of the conflict between Russia and Ukraine.
| Strengthening issues related to climate
The energy crisis in Europe, following the cut in the supply of Russian gas through Nord Stream 1, brought about a significant change in relation to issues related to climate change as an economic and security priority in the region. The push for energy independence aroused great interest among European investors, which was reflected in a strong outflow of funds in the fields of cleantech and renewable energy producers ($1.17 billion).
Another significant development in the energy sector in 2022 was unprecedented commitments to reduce carbon emissions. The European Union launched the program in May RePowerEUwhich includes an investment package totaling 300 billion euros, in favor of simplifying and accelerating the transition to renewable energy and additional investments in cleantech.
In August, the US announced an investment package totaling 370 billion dollars as part of theInflation Reduction Act (IRA) and other initiatives, in the form of tax credits on investments for developers of renewable energy projects. during the annual meeting COP27 In November, developed countries pledged to keep their pledge to invest about $100 billion a year to help developing countries finance the transition to clean energy, starting in 2023.
| Investment forecast for 2023: The markets will be able to return to adopting economic considerations
After a year of heightened geopolitical risks, 2023 may bring in its wings a return to more normal markets driven by economic considerations rather than geopolitics.
Global inflation is expected to drop sharply against a background of weaker fundamental effects, resulting from a drop in oil and gas prices at the same time as a global economic slowdown. As a result, we expect a gradual return to growth stocks, following a slowdown in regulatory policies in developed markets; large public investments in infrastructure, technology and clean energy; attractive valuations in certain technological fields; and the weakening of the dollar.
Given expectations for slower global growth and inflation in 2023, investors may consider a more complex approach to equities, such as covered call strategies, which benefit from slow-rising or range-bound trading. The potential income from underwriting covered call options can be particularly attractive as a supplement to dividend yields against a backdrop of higher interest rates.
| Strengthening is expected in the field of precious metals
Commodity assets – and precious metals in particular – appear to be attractive in the current environment, where investors seek to reduce currency risks in their investment portfolios.
The weakening and global economic slowdown increases the likelihood that precious metals will outperform other major assets in the near term. The gold-silver ratio fell from 95 in September to 79 as of December 6, meaning that one ounce of gold equals 79 ounces of silver, a much higher ratio than the long-term average of 68. Based on historical trends, if the precious metals enter For a bullish market, this ratio can be significantly reduced and the price of the may exceed the price of the
Silver, like gold, has a negative correlation of 0.50 with the US dollar, meaning it has currency hedging characteristics. Silver’s beta is almost double that of gold and has a correlation of 0.8 to gold. Therefore, silver is a more cost-effective alternative hedging strategy than gold to protect against currency risks. Silver miners offer similar characteristics, as they have a correlation of 0.8 to silver and a negative correlation of 0.53 to the US index. (DXY). Silver has greater industrial exposure than gold, although the dollar and real interest rates drive the performance of both metals.
In addition, silver is a necessary material for photovoltaic cells and could benefit from a structural windfall, as solar energy plays an important role in Europe’s transition to clean energy andInflation Reduction Act. In our opinion, these factors may offset, at least partially, the expected slowdown in industrial production.
| Chinese stocks are gaining support
A weakened dollar in combination with the easing of the corona restrictions, a rescue plan for the real estate market and expectations of an easier policy from the Chinese central bank helped stocks that were assessed at an attractive value to recover towards the end of 2022. More generally, the recovery improved the attitude of investors towards emerging markets (EM). Also the renewal of the dialogue between China and the USA following the meeting between President Biden and President Xi Jinping at the summit ofG20 contributed to a more positive attitude.
Sectors expected to outperform next year include technology, industrials due to higher spending on security, and shifting consumerism, led by vehicles, electric vehicles and e-commerce.
In addition, the reopening of China combined with large public investments in the transition to clean energy in the US (Inflation Reduction Act) and in Europe (RepowerEU) May further increase support for demand for commodities such as uranium, lithium, cobalt and nickel despite the slowdown in global growth. We expect these commodities to be largely immune to cyclical headwinds next year.
| The clean energy movement is spreading
Issues related to the transition to clean energy will likely continue to attract investors’ attention in 2023, as Europe works to achieve energy independence. In examining the trend of reducing carbon emissions, we identify three important considerations.
First, it is very important to assess the exposure of the investments throughout the value chain of the transition. The value chain includes disruptive materials (among others, lithium and) and specific goods (silver) needed for cleantech production. The value chain also includes the technology needed for production (solar panels), distribution (smart grids) and renewable energy storage (lithium battery technology), as well as the renewable energy producers who can produce alternative energy.
Second, there are big differences in the investment horizons of different cleantech investments. Solar and wind energies are currently the most mature cleantech markets, characterized by minimal production costs, rapid deployment and flexibility in installations. Nuclear energy has the potential for rapid growth in the medium term, following the development of small modular reactors, which can start operating at full capacity in about three years instead of seven years. The hydrogen sector is still in its infancy and has a longer investment profile.
Third, the investments in these alternative energy sources can be complementary. Solar and wind are variable energy sources that require expensive storage and local capabilities. Nuclear and hydrogen can replace oil in the long term, given the enormous power generation capabilities of nuclear and the adaptability of hydrogen fuel cells, thus zeroing out the carbon emissions of sectors such as transportation, construction and manufacturing.
In conclusion, despite the near-term macroeconomic and geopolitical risks, we still see intact multi-year trends for several important sectors such as precious metals related to technological innovation, clean energy and Chinese economic expansion.
The author is the director of the research department at Hasel Funds GlobalX. The above should not be considered as investment advice, recommendation or opinion regarding any financial products.