The global economy is facing strong headwinds from multiple sources - the Russian-Ukraine crisis not least among them - but while investors may be rightfully cautious, they should not overlook potential opportunities in this period of turmoil.
This sobering outlook on the world economy - which has also been impacted by the Covid-19 pandemic and rising inflation - was presented by Singapore’s senior minister, Tharman Shanmugaratnam, in his keynote address at the IMAS-Bloomberg Investment Conference 2022 on Wednesday (Mar 9).
“We have entered an era of profound uncertainty and fragility,” he said, adding that it was also an era of immense opportunities for investments, innovation, and structural improvements.
He said it would be a huge loss if government leaders and investors overlooked these opportunities - which include clean energy transition and food and health security - because of the current distractions in the financial markets.
However, he said the investment climate had changed due to several factors which had conspired to create the “perfect long storm” that will trouble policy planners and investors for some time to come.
“Investing for the future has become a much more complex game. It’s more complex than it was pre-pandemic. But it’s also more complex than it was two weeks ago,” he said, referring to Russia’s invasion of Ukraine and the international sanctions that followed.
He believed that while Ukraine could expect international aid to rebuild itself, Russia’s stature would be diminished economically and politically, whatever the outcome of the conflict.
“I think it will be a long time before investors re-enter the market or re-enter into trading relationships (with Russia),” said the former deputy prime minister and finance minister who is also chairman of the Monetary Authority of Singapore.
The situation, he said, would likely get worse before it gets better, but none of the outcomes would leave the world in a better place.
Turning his attention to inflation, he said it posed a serious risk to global economic recovery as central banks were faced with the dilemma of choosing between interest rate hikes to control price increases and promoting economic activities.
He said the current situation was worse than the 1973 oil crisis because of the broader ramifications arising from price increases in other sectors such as food, industrial metals, and fertilisers, aside from energy.
The inflationary pressure, partly as a result of supply chain disruptions due to pandemic lockdowns, is now accentuated by the war in Ukraine. Some economists say stagflation may be the next stage if not already.
There are concerns that the US Federal Reserve would raise interest rates “until something breaks because of the mandate to fight inflation,” said GIC’s chief investment officer Jeffrey Jaensubhakij, who spoke at a panel discussion at the same event.
This has grave implications for investors who are highly leveraged in the stock market and real estate sector as they may suffer deep losses, given the price appreciation of the two sectors in recent years.
The IMF may cut the global GDP growth forecast for 2022 in view of the high inflation and energy prices, said its research director, Pierre-Olivier Gourinchas, another panel speaker.
Opportunities in troubled times
The general view among the panel was that investors will likely adopt a defensive approach during this period, although some may be looking at potential opportunities in the commodity sector – a beneficiary of the current crisis - in Brazil and the Middle East.
The pandemic and climate change have also opened up opportunities in the environmental, social, and governance (ESG) sector in the emerging markets.
“Last year has been a breakout year for sustainability financing,” said Gourinchas. ESG-linked debt issuance in emerging markets more than tripled to $190 billion while sustainability-related equity flows rose to $25 billion, according to the IMF.
ESG investments now make up almost 18% of foreign financing for emerging markets excluding China, quadrupling the average for recent years.
The pandemic – which has disrupted economies and livelihoods – has become a recurring disease that many countries are still ill-equipped to cope with, said Shanmugaratnam.
“No one knows when the next pandemic will come but it will come. It will be more frequent, they’re likely to be more severe or as severe as Covid-19,” he said.
As for climate change – an existential threat that is causing a loss of biodiversity – managing global warming would require huge investments in renewable energy projects, clean methods of fossil fuel energy generation, carbon sequestration and storage, water and waste treatment, as well as coastal defence among others.
Similarly, to manage future pandemics better, it would be essential to invest in vaccine research and development, manufacturing capacity, surveillance systems, and distribution technologies.
Governments alone do not have the resources to fund these investments, he said. For example, it would cost about $3.5 billion annually for the next 30 years to pay for the infrastructure to tackle climate change.
However, the government could incentivise the private sector to share the costs, with measures such as carbon taxing and pricing framework, reliable sustainability data, clear disclosure and reporting guidelines, and effective taxonomies on sustainable financing.
“We cannot get distracted from the challenge of investing in climate change and pandemic security,” he said.