As global economies struggle to recover from the pandemic, new challenges have slowed growth in some sectors. The most impactful of these, perhaps, is the war in Ukraine. We’ve seen significant shifts in energy and trade as the result of shipping blockades and sanctions. Most Americans have also been concerned with rising gas prices and interest rate hikes domestically as economists brace for a recession.
How do 2022’s financial milestones affect your investment choices and business financing strategy? What should you be doing now to prepare for 2023? While there’s still some degree of uncertainty in what the future holds, there are ways to make your portfolio strong enough to weather changes. In this article, we’ll discuss the impact this year’s events have had on our wallets and how to stave off losses in the year to come.
If it wasn’t clear before that we live in a global economy, then the war in Ukraine should serve as a reminder. In March, the United States banned fossil fuel imports from Russia. In total, these account for only 8% of all petroleum imports to the country. The EU, however, saw an increase in wholesale gas prices by 109% and electricity wholesale prices by 138% between March and September. As winter sets in, increased demand for fuel will see consumers putting off spending in other areas to compensate.
According to the Federal Reserve’s Board of Governors’ mid-year assessment, “The increased geopolitical risks induced by the Russian invasion of Ukraine will weigh adversely on global economic conditions throughout 2022. Such effects are estimated in our model to reduce GDP and boost inflation significantly, exacerbating the policy trade-offs facing central banks around the world.”
This deeply affects anyone trading in the European market as well as import/export dealings overseas. The shift away from Russian energy sources means there must be a shift toward alternatives, whether they be sustainable energy planning, imports from other countries, or a combination of tactics. Those waiting on supplies and materials from across the pond could be facing challenges like diminished production and delayed shipping. The influx of refugees from Ukraine also has an economic impact, albeit more localized, on surrounding countries.
Many in the US have asked themselves if energy increases will continue and spill over into the US market. To stave off increases many businesses are seeking low-cost SBA financing or state and local C-PACE funding, where available, to add energy-saving upgrades to properties. With the right mix, savings offset costs at the outset, and can mitigate cost increases in the mid to long-term.
The Federal Reserve
The Federal Reserve has raised interest rates six times in 2022, with another, smaller hike expected before the end of the year. This is in a continued effort to fight inflation and, although inflation is slowing, it’s still not at the Fed’s target of 2%. That indicates the potential for more rate increases in 2023. Still, while rising interest rates slow down consumer spending, they can be a boon for investors. The alternative to interest rate bumps is inflation, which erodes consumer spending power.
Not all sectors are suffering from interest rate hikes. Financial firms, banks, and brokers typically see expanding profit margins with the rise in rates. Insurance companies see linear growth with higher rates equalling higher profits. Rental markets boom as increased residential mortgage rates drives movement to more affordable apartments and condos. Changes in rates will continue to shift consumer spending, deal financing, and inflation.
The factors above with some additional pressures have led to increased challenges with deal financing. Fewer deals mean the competition for those available deals is fierce. Lenders are tightening their requirements and increasingly favor those they’ve already had positive dealings with in the past. Direct lenders tend to be more sensitive in volatile markets. 2022 has seen movement of direct lenders upmarket to bigger deals that bring in more capital and provide better structure and pricing.
Lender focus tended to shift away from pre-pandemic financial performance and more to consistent cash flow and resiliency. The more easily a business has weathered past changes, the more competitive it’ll be as a borrower. When it comes down to choosing which business gets the deal, the more agile applicants win. A business that’s never sought financing before could be at a disadvantage by not having an existing lender relationship on which to draw.
The takeaway? Funding projects during increased interest rates continues, but companies need to find ways to become more competitive. The question of financial positioning becomes more significant, and businesses often have to restructure spending in advance of seeking loans in order to achieve the same or similar rates to previous quarters.
So how can your business be more agile and prepare to weather upcoming rate increases? The answer, in part, lies in diversity. Another piece of the puzzle is being proactive to lock in rates before they go up. These and other maneuvers can boost your resiliency if the recession everyone dreads becomes a reality in 2023. Here are just a few places to start moving forward when it comes to financing in this new climate.
Despite recent gains in the S&P 500 and DJIA, the stock market is still suffering more losses than it has in decades. Because investors still fear peak inflation, many panic and follow their impulses to get away from the market or hold off on investing altogether. Those more seasoned stockholders are less likely to bolt but will ensure they have some downside protection. This means playing the long game with investing and diversifying assets.
One way to diversify investments is by looking at Real Estate Investment Trusts, or REITs. Overall, Federal interest rate hikes are good for mortgage REITs. During the third quarter of 2022, the occupancy rate of REIT-owned properties increased to over 90%. If you’re shy about getting into properties directly, REITs could be your answer. Their strength lies, in part, in their diversity. Since REITs own multiple properties across sectors, they can still perform well even when one sector is down. They’re also less of a financial commitment than CRE because investing doesn’t require financing the entire purchase price of a single property.
It’s a good time to look at where your costs might be trimmed down. If you’re paying high interest rates on your current debt, look at refinancing into a lower-rate product. Also, consider switching to a fixed rate from variable rate financing to lock in rates before they increase again. Take aim at high-interest fixed-rate debt first and work on paying off your less expensive debt later on. As your credit score increases, work with creditors to restructure your loans.
When choosing investment or owner-occupied properties, evaluate the total cost of operating. While investment properties generally perform well, and because many markets face a housing crisis with not enough units available, not all property investments perform in a changing economy. Demand is uneven across markets and property classes see varying levels of demand.
One way to evaluate property investments is to take a detailed look at REIT performance. Although REITs have been performing well in 2022, not all of them have been gaining. Annaly Capital Management, Inc., EPR Properties, and Claros Mortgage Trust, Inc., are a few examples of REITs with plummeting earnings this year.
Do your homework either when seeking property to purchase or when selecting share-based investments. Look at historic performance as well and make sure plans align with your strategy for future growth. When investing, working with a broker can give you a strong advantage and reduce your research time.
Yes, who you know indeed makes a difference in the financial world, even if you’re casually investing. It’s especially true when access to deals becomes more competitive. As mentioned earlier in this article, lenders are deciding in favor of those borrowers with whom they already feel safe. Lenders you’ve proven trustworthy to are far more likely to approve another loan request than someone you’ve never worked with before. But what if this is your first time seeking financing? Make friends with a broker! Brokers spend a lot of time building relationships that give them leverage in competitive markets.
As a recap, although interest rates, global pressures, and inflation are challenging the markets, it’s not time to give up on investing. There are still deals to be had and opportunities to thrive. Diversification, patience, and doing your homework are part of a strong defense against recession. Having a reliable partner, like your broker, will put you in an even better position to succeed in 2023.