Where to Invest in 2023
And where not to.
The state of the world economy at the beginning of 2023 is much more fragile than it was at the beginning of 2022, for two reasons:
- Rising interest rates
- The war in Ukraine
Here’s how these two trends will impact the economy in 2023.
1. Rising Interest Rates
Interest rates in the West have not *just* been low since the 2008 crisis — they have been declining every year since then.
Low or absence of real growth on one hand, and inflation below the 2% target on the other, compelled policymakers to use every tool at their disposal to stimulate the economy somehow.
In this case, easy access to credit was chosen.
When the health crisis began in March 2020, policymakers decided to support the economy that was partly shut down by printing important amounts of money.
While this sudden inflow of cash may indeed have saved the system, it also created perfect conditions for sky-high inflation.
As the economy reopened, policymakers have now focused on bringing inflation under control.
They do so by limiting the amount of money in the economy by raising interest rates.
What Do High Rates Mean for Asset Prices?
Interest rates increase always slows down the economy.
When this happens, potential financial bubbles pop, businesses that have never been profitable go bankrupt, and asset prices decrease as the entire economy slows down.
Bond prices decrease, stocks decrease, real estate decreases, and gold decreases.
Since cash is getting “rarer”, it becomes an asset of choice as it can be lent against higher interest rates.
Conclusion: in a rising interest rates environment, cash is king.
2. The War in Ukraine
Energy suppliers drastically decreased their output when the world shut down in 2020.
However, they did not increase production fast enough again when it reopened in 2022.
As a result, energy inflation began as early as January 2021.
Yet it truly accelerated when Russia invaded Ukraine and an energy embargo was established against Russia.
Since Russia was one of the biggest energy providers to more than a few European economies, the embargo only made energy supplies worse, which sent energy prices as high as twenty times their normal prices.
What Does the War in Ukraine Mean for Asset Prices?
Energy is likely to remain high in the next two to three years as countries will need to build new energy-producing capabilities and infrastructures, and as the energy markets are reorganizing around this new reality.
What Does That Mean for Farmland?
Interest rates don’t impact the price of farmland much as farmland prices depend on the price of food and on the supply and demand for farmland.
Food is something consumers will always have to buy regardless of the economic conditions.
And farmland isn’t a leveraged (aka, bought with debt) asset, so interest rates don’t influence prices much.
As long as the war in Ukraine continues though, countries dependent on Ukraine for food remain at risk of hunger.
We expect that this will continue to push prices for farmland as it is expected that these countries look for food producers in other places than Ukraine.
It is likely that 2023 won’t be financially easy.
As policymakers do all that they can to bring inflation under control, it is likely that they will sacrifice the economy for a while to achieve this purpose.
In that environment, cash will be the asset of choice, and farmland will be one of the most interesting alternative assets for investors seeking to invest in a sector that does not depend on the state of the economy.
Interested to invest in farmland? Sign up on landex.ai today.
Disclaimer: This article is not intended to be relied upon as financial advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor.
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