October 21, 2024 - The global economy will face a dynamic mix of challenges and opportunities over the next 12 to 18 months. Managing Partner of Citrin Cooperman’s Forensics, Litigation, and Valuation Services Practice, Mandeep Trivedi recently moderated a panel of top leaders in finance, macroeconomics, and banking during the Optimum Bank Virtual Banking Conference hosted at Florida Atlantic University. Professionals, including Daniel Lacalle of Tressis, Gareth Soloway of Verified Investments, Phil Mackintosh of Nasdaq, and Dylan Smith of Rosenberg Research, highlighted key trends, such as rising debt levels, inflation, geopolitical tensions, and shifts in global trade. They stressed the importance of central bank actions, the impact of demographic changes, and potential growth in sectors like renewable energy and technology. While concerns about slower growth and financial instability persist, strategic investments in areas like gold, emerging markets, and renewable energy are seen as promising opportunities.

Global economic trends: Analyzing key developments

As businesses around the world navigate through the remainder of 2024, several panelists provided insights into the global economy, which is expected to see varied trends over the next 12 to 18 months. Daniel Lacalle, chief economist at Tressis, reflected on economic improvements but emphasized concerns over rising government spending fueled by elections in over 70 countries. He predicts prolonged stagnation in the eurozone, modest United States (U.S.) growth driven by public debt, and Asia leading global growth. He also expects that while the manufacturing sector weakens, the services sector will expand, particularly in developed economies. Lacalle highlighted concerns over growing personal debt and the risk of secular stagnation—marked by low growth and persistent inflation—rather than a full-blown recession.

On the other hand, Gareth Soloway, chief market strategist at Verified Investments, pointed out that, despite rising global and U.S. debt, the expected recession has not yet occurred. The Federal Reserve’s actions, though appearing restrictive, have remained relatively loose due to emergency lending facilities. Soloway anticipates inflation remaining around 2.5%, with ongoing government spending and no political will to address fiscal responsibility. While a recession as severe as the 2008 financial crisis seems unlikely, Soloway warned of a prolonged period of low growth.

The banking sector under pressure

Banks face challenges from rising delinquencies and an ongoing "mini-recession" in small- and mid-cap companies. Although large mega-cap companies continue growing, other sectors struggle under higher interest rates. Phil Mackintosh, chief economist at Nasdaq, added that real estate investment trusts (REITs) are negatively impacting small-cap firms, and locked-in mortgage rates have limited housing supply, driving up rents and prices. Both Soloway and Mackintosh noted that lower interest rates could provide relief to housing markets, boosting home sales and improving bank profitability.

Despite economic struggles, Mackintosh highlighted that U.S. market outperformance has been driven by the "Magnificent Seven" stocks, which generate real revenues and margins—contrasting with the profitless dot-com bubble of the early 2000s. However, mid- and small-cap companies are struggling with shrinking margins and slowing hiring decisions with Mackintosh warning that rising layoffs could harm credit quality.

Geopolitical tensions and their impact

Geopolitical tensions have been a significant drag on global economic growth and trade. Lacalle highlighted the long-term effects of these tensions, which can take three to four years for economies to recover. Increased polarization between nations further erodes global cooperation and trade, compounded by rising government expenditures and declining tax receipts.

Dylan Smith, vice president and senior economist at Rosenberg Research, identified opportunities amidst these tensions, particularly as companies realign supply chains away from China, creating opportunities for regions like Mexico, which is now the U.S.'s largest trading partner.

South Asia, particularly India, is also expanding its manufacturing capabilities. Smith pointed out that defense and aerospace stocks are benefiting from rising global conflicts, making them vital components of diversified portfolios. He emphasized gold as an essential asset amid rising geopolitical risks and potential monetary debasement.

Global interest rate policies and investment impacts

Global interest rates remain a critical area of concern. Smith noted that fiscal stimulus and strong consumer spending have prevented a recession in the U.S., but he predicts slower growth in the future with a disinflationary environment marked by slack in labor markets and a slump in global manufacturing. Smith believes that inflation fears are overstated, and he anticipates U.S. interest rates will fall rapidly within 12 to 18 months, creating new investment opportunities. However, regions like the United Kingdom (U.K.) may lag in this process.

Mackintosh echoed concerns over rising U.S. interest rates and their impact on long-term debt. Refinancing could stress small-cap companies and the housing market with commercial real estate, particularly office spaces, being vulnerable to credit risks. Mackintosh suggested that faster rate cuts could help ease pressure on mortgages and real estate markets, although he cautioned against rapid reductions signaling a recession.

Navigating a high inflation environment

High inflation presents significant challenges for businesses. Soloway emphasized the importance of customer service and adding value to justify price increases. He warned that while inflation is decreasing, aggressive rate cuts by the Federal Reserve could reignite inflation and unsettle markets. Soloway noted that while mid- and high-income consumers continue spending due to stock market performance, lower-income individuals are struggling with rising prices.

Smith explained how businesses have adapted to high inflation with many maintaining high profit margins by keeping prices elevated, even as costs decreased. However, pressures in sectors like fast food are forcing companies like McDonald's to reduce prices to remain competitive. As consumer markets slow, businesses face an increasing demand to manage costs, leading to potential layoffs and downsizing.

Shifts in the labor market

The labor market is showing signs of loosening. Mackintosh pointed out that the recent rise in unemployment is largely due to more people, including immigrants, joining the workforce along with real wage growth. Layoffs remain minimal with the labor market stabilizing, rather than weakening toward a recession-triggering point.

Soloway cautioned that job cuts may be on the horizon as businesses become more guarded about hiring, evidenced by declining job openings. He warned that the next six to 12 months could bring more economic challenges with businesses potentially tightening budgets and layoffs increasing.

Smith observed that companies are gradually reducing hours and transitioning employees from full-time to part-time before layoffs occur, signaling a weakening labor market. This gradual process is expected to continue, eventually resulting in rising unemployment rates.

Shifts in global trade

While global trade is still growing, Lacalle highlighted a significant slowdown, particularly in a high inflation environment with rapid money creation. He warned that there is no "soft landing" in these conditions; economies will either experience stagflation or recession. Lacalle pointed out that current disinflation trends are stalling with potential interest rate cuts from central banks potentially worsening the situation. He noted that global trade is shifting toward countries producing value-added products and technology while traditional exporters, especially in emerging economies, are seeing weaker growth.

Soloway discussed China's prolonged economic slump since COVID-19, exacerbated by government crackdowns on domestic and international companies. Many businesses have diversified operations to countries like India and Thailand, further reducing China's growth. However, Soloway sees potential investment opportunities as China begins to reverse its stance and attempts to attract international companies.

Renewable energy: A long-term investment opportunity

Renewable energy is a key growth area, according to Lacalle, who holds a bullish outlook from a private equity perspective. However, he remains cautious about publicly traded renewable energy equities due to market valuations and balance sheet management concerns. Lacalle highlighted the need for large-scale mining of minerals like copper, lithium, and rare earths, essential for renewable technologies.

Soloway agreed, expressing optimism about advancements in electric vehicle (EV) batteries and potential growth in the robotaxi market. He sees long-term potential in the renewable energy sector but warns that some stocks, like Tesla, may be overvalued.

Mackintosh added that while Europe has strong investor interest in environmental, social, governance (ESG) investments, the U.S. lags due to unreliable data and reporting. Despite the competitiveness of solar and wind energy, high infrastructure costs have hindered profitability, leading to underperformance in renewable energy exchange-traded funds (ETFs). Mackintosh sees renewable energy as a potential long-term play, requiring time for companies to establish revenue streams and amortize fixed investments.

Long-term investment considerations

Mackintosh highlighted demographic challenges facing developed countries, particularly shrinking populations and aging workforces. These shifts will significantly impact consumer spending patterns with sectors like hospitality and healthcare seeing increased demand, though profitability may be constrained by rising costs. Mackintosh predicts slow global growth over the next two years with aging populations in developed economies acting as a drag on overall growth.

Smith expressed concern over rising U.S. debt and growing deficits, warning that national debt discussions will dominate the 2028 U.S. election. While government spending currently boosts growth, Smith warns that it may eventually crowd out productive private sector investments. Despite these concerns, he remains optimistic that structural reforms could address these issues.

Conclusion: Navigating global investment trends

As global economic trends evolve, professionals stress the importance of strategic investments and diversification. Soloway warns against the emotional nature of investments driven by social media hype, particularly in cryptocurrency, advising investors to focus on data and charts for better long-term decisions. Mackintosh emphasizes diversification across sectors and regions, while Smith advocates for bonds and a balanced portfolio as interest rates fall. Lacalle advises investors to remain calm during market corrections and focus on long-term opportunities in demographics, sustainability, and disruptive technologies.

The global economy faces complex challenges ahead, but with the right strategies, investors can navigate changes and identify opportunities for sustained growth. Watch the full recording of the conference to gain deeper insights into global economic trends, including risks, opportunities, and valuable banking perspectives. Please reach out to Managing Partner, Forensics, Litigation, and Valuation Services Practice, Mandeep Trivedi if you have any additional questions.