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'Embrace uncertainty': This is what I learned at Davos 2023

Several key topics dominated discussions around inflation and interest rates at Davos 23.

Several key topics dominated discussions on a new investment narrative around inflation and interest rates at Davos 23. Image: World Economic Forum

Huw van Steenis
Vice-Chair, Oliver Wyman
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Sustainable Finance and Investment

This article is part of: World Economic Forum Annual Meeting

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  • Insights from Davos 2023 into a new investment narrative as the war in Ukraine, China's reopening, the energy crisis, climate change and deglobalization dominated discussions around inflation and interest rates.
  • From the United States to Europe, energy security and decarbonization are changing the investment narrative, although the landscape of energy transition remains messy.
  • Concern remains over whether central bank intervention will be in step with economic growth without risking a recession.

The mood at Davos was one of relief, along with a measure of giddiness about what comes next. Rarely has the group been so split in its investment outlook.

Relief at least came because three macro scenarios are not playing out as feared: China has ended its zero-Covid policy and reopened; inflation is abating; and Europe got lucky with a warm winter and falling energy prices.

Whoever you spoke with around inflation and rates, however, the war in Ukraine, China’s reopening, the energy crisis, climate change and deglobalization dominated discussions. Sitting across 40 private meetings and panels, I better understood the mindset of businesses, investors and policymakers. Here are three of my takeaways.

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1. Energy security and decarbonization are changing the investment narrative

The Inflation Reduction Act (IRA), which incentivizes clean energy, was one of the most discussed topics at the annual meeting this year. The massive green subsidies it offers (around $1 trillion in subsidies, incentives and loans, according to Kaya Advisory) are attracting every European industrial company I met with to consider expanding or setting up a US operation.

I argued the IRA could be as consequential as France’s Messmer Plan to go nuclear in 1974, the world’s most successful energy security and decarbonization plan until now.

There was a clear realization that Europe needed to step up.

Belgian Prime Minister Alexander De Croo told me he was arguing for a strong European response, such as a Climate Investment Act. As one of the world’s best-known economists told me, if there is to be a trade war, a green subsidy trade war is the least bad because it is self-limiting. The money eventually runs out and even with some wastage, it should drive growth and greater energy security. My meetings also suggested UK policymakers were still vacillating between anger and denial about green subsidies rather than crafting a strategic response.

Energy security and climate policy are shifting the investment narrative and the flow of capital. A private gathering of some of the world’s largest asset owners and investors, held by FCLTGlobal, underscored the deep and growing interest, despite the ESG (environment, social and governance) backlash narrative.

It was striking that there were almost as many different approaches to investing in energy transition as there are investors. In contrast, the rigidity and binary nature of the European Union’s green taxonomy and fund rules weren’t viewed as very useful to guide portfolios or foster transition finance.

And corporates remain keenly focused. I heard many CEOs say the energy crisis and lens on decarbonization were prompting energy efficiency programmes and major supply chain changes. Nicolai Tangen, head of the Norwegian sovereign wealth fund, said on a panel that six months ago, just 10% of the companies the fund invested in had credible net-zero plans; today, it’s 17%. Norges expects all its investee companies to develop one; otherwise, they will vote against the directors.

“Energy transition is going to be messy and volatile,” argued Jason Bordoff, dean of the Columbia Climate School. The handoff between fossil fuels and renewables is incredibly complex and full of inertia, given our current infrastructure. Mark Carney told me on a panel I hosted that we need policies that will ramp up the ratio of clean energy to fossil fuel investment from one-to-one now to four-to-one by 2030. Little wonder this investment problem and opportunity is the focus of the world’s largest financiers.

Longer term, the narrative of deglobalization driving inflation is becoming embedded.

Huw van Steenis, Vice Chair, Oliver Wyman

2. Macro uncertainty: where’s the new equilibrium?

The resilience of the European economy – despite the energy crisis and war in Ukraine – seemed to be the main source of optimism. But where monetary policy lands and whether we get a soft-ish landing remain vigorously debated.

Three pivotal discussions stood out:

  • Will China’s reopening be inflationary or deflationary? Conventional wisdom is that reopening and purchasing energy is inflationary. But some of the world’s largest investors wonder if this will help ease supply chain problems and not provide as large an impulse.
  • Given the “long and variable” lags in monetary policy, what will the effects be after the dramatic interest rate increases over the past year?
  • What is the outlook for the Ukrainian war and what are the implications for energy markets and globalization?

As American economist Milton Friedman famously wrote, “Monetary actions affect economic conditions only after a lag that is both long and variable.” So, most people expect central banks to see how things turn out. The question at several panels was will there be several rounds of tightening, like most countries experienced during the 1970s recession, or only one, as Germany required during the same period.

Inflation may have peaked but it may be more persistent, argued former US Treasury Secretary Larry Summers – an argument for continued vigilance. Many Davos attendees have become relatively sanguine about the economic outlook in the United States but some investors remain concerned by the risk of oversteering by the European Central Bank (ECB). Just as the ECB acted far too slowly as the economy was accelerating, these investors fear policymakers may now be hasty to catch up, as the economy is slowing, causing a recession.

Longer term, the narrative of deglobalization driving inflation is becoming embedded. But economic historian Niall Ferguson argued that rumours of the death of globalization are greatly exaggerated. CEOs of a few major banks supported Ferguson’s view, saying many large corporates are adopting a “China plus one” strategy to resist investing only in China without avoiding China altogether. Diversification and risk management are their bet.

The bottom line is that there remains significant uncertainty on rates, growth, a new equilibrium and what that means for the investing backdrop.

3. Tech and fintech: soft or hard landing?

“Are we going through a hard or soft reset of tech valuations?” That was a question from one of the smartest investors I know (with a stellar track record in tech investing over several decades).

While valuations pique their interest, they are sceptical about exposures in private markets to tech, partly to keep funds available for existing investments. They are nervous about a possible second round of monetary tightening and are fretful of some parallels to the beginning of the Millennium when the Nasdaq fell a further 21% in 2001 and another 32% in 2002 after a 39% plunge in 2000. As investor Seth Klarman once said, “Being very early and being wrong look exactly the same 99% of the time.”

That said, some investors I know are working on some private names that have fallen far. For example, one of the best fintech investors at Davos said he was looking only at business-to-business platforms, as he feels the washout in retail platforms has more to go.

Meanwhile, the crypto grifters who have been dominating pop-up hangouts in Davos in recent years have largely gone, in part, replaced by a Manchester United pop-up. The good news is that the crypto implosion has hardly impacted the core banking system and only damaged a handful of smaller West Coast banks that got involved.

I got the sense, too, that the rage for central bank digital currencies (CBDC) is waning. The live pilots in the Bahamas and China are yet to be successful and the fear of missing out on crypto has collapsed. Most central bankers at Davos are sticking to desk exercises, although the ECB governors at Davos still carry the torch for a CBDC.

“Just as war is too important to be left to the generals, the future of money is too important to be left just to central bankers,” I argued in a TED talk last year. I suspect Western politicians will seek to slow the pace of monetary innovation; instead, fixing bottlenecks and improving security with incremental solutions will be the focus.


Where next?

So what about this year’s unusual mix of giddiness and uncertainty? Annie Duke argues in her book, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, “Wrapping our arms around uncertainty and giving it a big hug will help us become better decision makers”. Given the sobering and uncertain outlook, it’s best to embrace the uncertainty and weigh one’s bets wisely.

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