The severity of the economic downturn, inflation trajectory in the medium term, the impact of geopolitics on markets and climate risk to portfolios are the main risks facing the global economy, Ravi Menon, MD, Monetary Authority of Singapore, said on September 20.
The global economy was facing a severe bout of inflation which has necessitated monetary policy tightening by central banks at a pace not seen in the last four decades, the Singapore central bank chief said at SuperReturn Asia Conference, a gathering of leading private equity and venture capitalists.
Also read: MC Explains | Does the market expect the Fed to deliver another hefty rate hike?
Menon said the global economy was also facing a downturn and its impact would depend on how high and persistent inflation remains, in which case central banks have no choice but to tighten more and for longer than markets are predicting.
He said the risk of the major advanced economies entering a recession in 2023 was high while Asia-Pacific economies were at lower risk but could see a spill over from the broader global slowdown.
Red-hot inflation has forced central banks to raise interest rates at a rapid pace.
The Reserve Bank of India has raised the repo rate by 140 basis points to 5.4 percent over the last four months. Economists widely expect the repo rate at 6 percent or so by the end of 2022. The next meeting of the Monetary Policy Committee is scheduled from September 28 to September 30.
Later in the day, the US Federal Reserve begins it rate-hike meeting during which the central bank will also announce its projections that will have a bearing on policy course for the remaining and the next year.
In July, the Fed Reserve raised the federal funds target rate by 75 basis points (bps), taking the total increase in rates to 225 bps in 2022. That was the second Fed meeting in a row that ended in a 75 bps rate hike. The 75 bps hike in June 2022 was the largest since November 1994.
One basis point is one-hundredth of a percentage point.
Market strategy
Separately, Menon also suggested three pivots for private market investment strategies in the uncertain environment ahead.
First, pivot from growth to sustained profitability. Menon said more managers are rightly focused on selecting companies with strong balance sheets and good prospects for profitability and as these shifts are being made to strengthen resilience, the industry can also position itself for more sustainable growth.
Second, pivot to South and Southeast Asia as they are becoming one of the most important regions for private market investment opportunities. Last year, India and ASEAN together accounted for almost 30 percent of the record $296 billion of private equity investments that poured into the Asia-Pacific region last year.
Third, pivot to private credit as a new avenue for capital raising as, according to Menon, private credit will be a key driver of growth in private markets.
"There are opportunities for private credit to play a larger role in Asian enterprise financing just like its private equity counterpart," he said. "Despite the uncertain global outlook and more cautious lending environment, private credit players are well placed to seize lending opportunities in Asia and globally."
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