World economy navigates potential crises

• Corporate financial performance is up from the previous quarter, but down year over year.
• A lack of alignment in markets around future central bank rate movements and the potential European energy crisis are top of mind.
• Russia and Australia have lower financial performance indexes (FPIs), but for different reasons.

Overall market performance is down, but it’s clawing its way back up post-pandemic, according to data from the KPMG Financial Performance Index (KPMG FPI). What we’re seeing is growing long-term strength in the economy while experiencing short-term turbulence from macro factors.

According to the KPMG FPI, overall corporate financial performance increased marginally in Q3 2022, reaching 90.7 (out of 100), compared to 89.84 in the previous quarter. Higher overall financial performance reflects central bankers' trying to rein in inflation, even if this means negative effects on capital markets.

The quarter-over-quarter increase is boosted by FPI scores in Australia (up 11.72.%) and Brazil (up 9.09%), both commodity-driven economies with commodity prices coming off recent highs. And while the Australian market is up over 9.06%, their FPI score of 78.43 is the second lowest in our 40-country index. The Australian market contains a large number of speculative listed companies, especially in exploration and mining, and are more susceptible to the global US dollar fluctuations and commodity prices.

France and Italy witnessed some of the largest q-o-q FPI declines, with FPI scores decreasing -0.96% and -0.68% respectfully in 3Q22. The Utilities sector was a major contributor in both countries, with FPI down -1.49% in Italy and -69.10% in France. The Utility sector in France has fallen from an FPI score of 94.40 to just 29.17, making it one of the worst performing sectors in any European country, albeit this change in score is being driven by smaller utility players at present. A traditionally stable sector, Utilities right across Europe will be interesting to watch in the 4Q22 FPI report as the effects of new government policy around energy and winter start to take hold.

On a global scale, Infrastructure and Real Estate companies came in with the lowest FPI score of all main sectors. The subsectors show interesting results: Infrastructure is up, but Real Estate is down. Infrastructure-related companies in Construction and Building Materials, Construction and Engineering were rising. However, Real Estate Services, Real Estate Operating Companies, Real Estate Management Companies and Real Estate Developers were all dropping. If interest rates rise in the coming quarters, then these sectors could be hit hard and FPI scores could fall significantly.

While not tracked in FPI, many Real Estate Investment Trusts (REITs) linked to commercial property (except logistics) are likely to find it challenging to balance higher refinancing costs with unitholder return expectations, and with a global recession likely to increase vacancies, this could be a sector to watch.

The FPI shows Consumer Finance companies regaining traction post-COVID only to be hit now with global inflation and subsequent interest rate rises. Asia HQ Consumer Finance companies are stronger at the moment, whereas Western HQ Consumer Finance companies have pulled back. The table below shows the movement for Consumer Finance companies from pre-COVID FPI (Q4 2019) until the most recent quarter (Q3 2022).