Unraveling the Trends: Factors Behind Decrease in Investment Deals in Q1 2023

Investment deals have steadily declined in the first quarter of 2023. A fundamental reason for this is that the investment scenario is constantly shifting and uncertain. Besides, the factors contributing specifically to this uncertainty include the world emerging warily from covid-19, the post-Ukraine-Russia war situation and the overall turmoil in the financial sector.

Based on the research study done by Xpheno, there has been a 44% drop in the number of investment deals in India for Q1 2023 when compared with Q1 2022. A contributing factor could have been the global decline in investment deals making the pinch felt in India, as well. Let’s examine why investment deals have slowed down and what the implications are for various sectors and for the economy on the whole. 

Market volatility

Markets, by nature, are known to be volatile. However, in Q1 2023, there was increased market turbulence. One reason why this was happening was that much of the world was still very cautious when engaging with the post-pandemic era. Is the pandemic over or will it strike again was the question that dominated the market’s thinking. Geopolitical issues like the ongoing war between Russia and Ukraine, and resultant global trade tensions contributed to market volatility. This wariness impacted investor behavior severely. They became very cautious and were not committing funds as freely as they were doing earlier.

This cautionary approach had already led to the global baseline forecast for growth falling from 3.4 per cent in 2022 to 2.8 per cent in 2023. It is expected to settle at three per cent in 2024.  

Changes in regulatory policies

Governments worldwide have been scrambling to adapt to emerging challenges. This has led to change in regulatory policies globally. When investors become unsure of the regulatory environment and feel that government policy is either unclear or uncertain or both, they become tight-fisted. They adopt a let-us-wait-and-watch approach. This, therefore, slows down investment decisions and impacts deals adversely. Investors are looking for clearer guidelines and seek reassurances. They are not against investing, but they would prefer to wait for clarity to emerge before they put in their money.

Shifting investor preferences

As always, investors keep changing their preferences. In Q1 2023 too, they have looked to pick on sectors and industries that they believe are secure investment havens. Renewable energy, technology and healthcare have been the more preferred investment destinations in Q1 2023. So, there has been a slowdown in the traditional industry segments where investment deals are known to have been made in the past. The shift in investor preferences is a natural process that happens periodically. This is not something that should cause concern or lead to panic. Over time, all sectors will see cyclical behaviors in investment deals.

Concerns over valuation

Investment decisions are always governed by asset class valuations. When investors begin to perceive that certain assets are overvalued, they choose not to invest. In Q1 2023, various market segments may have been overvalued. This is why investment deals did not happen in those segments. Again, it is not as investors have moved away forever. They will wait for the markets and valuations to correct themselves. Until then, the deal activity will be lower.

The slowing economy

Investors are constantly watching over factors that impact the overall economy. In Q1 2023, supply chain disruptions, high inflation and reduced consumer spending impacted many markets. This led to investors becoming risk-averse. And therefore fewer investment deals happened. Essentially, investors adopt a conservative attitude the moment they sense uncertainty over business performance and an economic slowdown. Largely, investor sentiment is driven by their perception of what is happening and that perception, in turn, drives what happens in the immediate future.

Geopolitical factors

Trade tensions, conflicts between nations and political strife in countries can immediately impact the global economy. Q1 2023 did see a fair share of such issues confronting the world. Investors perceived uncertainty and chose to be cautious. As a result, fewer investors ventured to strike deals in affected markets.

FDI’s growing impact

Foreign direct investment (FDI) plays a big role in a local economy. And FDI is governed by global geoeconomic factors. When rising geopolitical tensions lead to supply chain disruptions in a region, FDI flow to that region gets impacted adversely. This means investor confidence is shaken in that region and investment deals slow down or don’t happen at all. World leaders must work towards reducing geopolitical tensions so that FDI flow does not get interrupted. This calls for mature policy-making and partnership among the world’s leading and emerging economies.

The future looks brighter

The International Monetary Fund published a report at the end of Q1 2023 in April this year,  titled ‘A Rocky Recovery’. That title sums up what is in store for the world. What the future holds for us is a recovery. The financial markets landscape is always subject to change. While the overall slowdown in the economy, geopolitical factors, wariness about inhabiting and engaging in a post-covid-19 world, market volatility, concerns over valuations, shifting investor preferences, and regulatory changes may have contributed to slowing down of investment deals, the situation will change. A new order will be established and will soon appear on the horizon. All the factors that caused the slowdown will have to be monitored closely as the rest of 2023 plays out. While doing this, keep a close watch for how businesses and sectors are being  impacted. That is when the recovery will show up with the global economy bouncing back – slowly but surely.