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Clim8’s 2023 Macroeconomic Outlook

Clim8 Investment Team

27 January 2023 Sustainable Investing

2022 was a turbulent year for the global economy, characterised by inflation, a brutal conflict in Ukraine, and fiscal and monetary tightening. In 2023, we expect inflation to abate, but also expect global economic growth to be weak. As such, we will endeavour to find the most attractive companies and funds across multiple geographies, whilst also orienting our portfolios to the regions we believe to be best positioned economically. 

In the US, there are signs that a recession is around the corner. The most telling of all of them all is the inversion of the yield curve. The 10 Year-3 Month treasury yield spread is (at the time of writing) -0.74%, and it has been at similar levels before the recession caused by the ‘dot-com’ bubble or the one caused by the 2008 Global Financial Crisis. However, one could argue that despite the macroeconomic headwinds, the American economy is faring better than this indicator suggests. Inflation continues to abate, and unemployment is at a healthy 3.5% (lower than in february 2020), and consumer sentiment has been steadily improving since its nadir in June 2022. Time will tell whether or not the Federal Reserve’s goal of a ‘soft landing’ will be realised. 

Another key economy to keep an eye on is the Chinese economy. As the ‘zero covid’ policy comes to an end, one would think that industrial production and domestic demand would increase as a result. This will not only help global supply chains, as it means fewer factories will be shuttered due to rising caseloads, but will also spur domestic Chinese demand for goods and services. President Xi Jinping even said restoring and expanding consumption should “take the precedence” in regards to priorities for 2023. As such, there is an opportunity for economic expansion for select Chinese equities, as well as global equities that have a high proportion of revenue from China.  However, one cannot discount the possibility of major Chinese cities and industrial hubs going back into targeted lockdown. Coronavirus caseloads are reaching an all-time high (as of writing, approximately 118,000 people have Covid in mainland China), and less than 50% of over 80s are fully vaccinated. A policy u-turn cannot be discounted completely, especially as China has done so before. As such, it remains prudent for businesses to not be completely reliant on Chinese-focused supply chains. 

Within Europe, 2023 is likely to be a difficult year. A warmer than expected winter (and significant fiscal support) has reduced the risk of natural gas rationing on the continent, but challenges in this sector remain. While a reduction in natural gas prices has caused inflation to abate faster than many expected, it is still alarmingly high in the Euro area, registering 9.2% in December. It will take many, many months for this to recede to the 2% target set by the ECB (European Central Bank). Furthermore, in order to address this high level of inflation, the ECB has started to raise its interest rate. It is likely that the ECB will continue to raise rates until inflation comes down meaningfully, meaning that the squeeze on individuals’ cost of living will likely continue. This in turn will cause a decrease in the aggregate demand on the continent, and will likely push the European economic area into a recession. However, there is still the opportunity for growth among selected European companies, especially as European stocks are trading at a huge discount compared to US ones (the P/E ratio of a typical MSCI Europe ETF is trading at a ~38% discount to a typical S&P 500 ETF*). Furthermore, there is a chance that the economic environment changes for Europe in 2023. If a peaceful solution to the conflict in Ukraine is found, or if the reopening of the Chinese economy is smoother than expected, then expect Europe to benefit massively. However, it is the unfortunate reality that a peaceful resolution in Ukraine currently remains elusive, and it is unlikely that the benefits from China reopening will not be properly realised until the second quarter at the earliest. 


This paints a rather myopic picture, however, it needn’t be that way. In the transition economy space, there is a huge opportunity to be seized upon in 2023.  For instance, the solar, wind and energy storage markets are expected to continue their respective growth journeys. In the US last year, renewables produced more energy than coal, and it is our belief that the provisions in the Inflation Reduction Act will accelerate this growth even more so in 2023.  We also expect tougher regulation to emerge regarding the labelling of ESG funds. In the USA, the SEC (Securities and Exchange Commission) have proposed a rule seeking to promote consistent and comparable ESG disclosures, and the EU are close to finalising new regulation pertaining to corporate sustainability reporting, as well as green bonds. These new regulations will improve transparency and make impact investing less complex for institutional and retail investors alike. What is nearly certain, is that ESG and impact investing funds will continue to grow in AUM. According to a report by PwC, AUM of ESG focused funds are projected to increase 84% compared with 2021 to $33.9 trillion in 2026, making up 21.5% of total assets under management.

The transition economy will keep growing in 2023, despite major economic headwinds. As an investment team, we will seek to take advantage of the opportunities present due to the reopening of the Chinese economy, as well as select equities within the European equity market that we consider to be attractively priced. However, we will do so in a way that minimises the downside risk, by having a plurality of our equity exposed to the United States. 2023 will be a challenging time for a lot of people for a number of reasons. But we remain committed and focused on growing your money, whilst also ensuring environmental impact. 

From the Investment Team at Clim8

*source FactSet data extracted 11/01/2022, funds are iShares MSCI Europe and iShares Core S&P 500

With all investments, your capital remains at risk. Clim8 Limited does not offer financial advice and this blog is our investment’s team view on the 2023 market.