Resilience Reigns, Efficiency Takes a Backseat
Macro Outlook November 2023
The Economy
Inflation Scaries: Is the Worrying Over?Â
After a couple of years with inflation well above 2%, financial markets anticipate inflation to return within the historical range observed after the Great Financial Crisis. This seems optimistic. In the inflation corner, you have climate change, a demographic mismatch in the workforce, deglobalization and under-investment in resources. In the disinflation corner, you have productivity through AI and other technologies.
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Looking for work(ers)
Most developed economies have a ratio of new workers to retiring workers below the replacement level of 1, as shown in the graphic below. Â The world economy is used to an excess of workers which had been the standard since the 1950s. In the 1990s, Globalization exacerbated the relative power of employers over employees. The employer supremacy is now in transition as observed by the growing popular support that unions have within the general population.
The Opportunities
Engineering
Engineering firms benefit from increased infrastructure spending. As governments are enacting industrial policies for reshoring and green technology, engineering firms are getting contracts for design and implementation. Recent earnings calls from engineering firms reflect an increase in activity. Important to note that cement companies are not seeing the demand they were expecting. This indicates that we are still in the planning phase where engineering firms should thrive.
Grocery Stores
Economic data releases for the month of October have been weak so far, indicating an economic slowdown may be at hand. Future Positive Investors can look to sustainable grocery stores which are resilient during economic downturns because they provide essential products and generate stable cash flows.
Short Private Equity Firms
Private equity firms have been an amazing success story over the past 15-20 years. At the macro level, their business model relies on purchasing firms that are deemed inefficient, cutting costs and leveraging the balance sheet. Once the firm is stabilized, it is listed on the stock market or sold to a strategic investor or another private equity firm. Since the pandemic, efficiency is taking a back seat to resiliency and labor is gaining power relative to owners. This is making the deep job cuts required by the typical private equity firms more difficult. Moreover, leveraging the balance sheet was relatively easy when interest rates were near zero, it is much more onerous now. Finally, private equity firms typically pay salaries and other fixed costs from base fees and make profits with carried interest. We suspect major disappointments in carried interest for most private equity firms in the future.
The Sustainable Themes
The Market
Economic data has been weak for activity in Q4, so far. A recession is our main scenario for 2024.
These are our probabilistic outlook and financial forecasts for the end of 2024.