After a dismal year for markets, William Davies gives his thoughts on risks and opportunities in the market as we head into 2023. While there is plenty to be cautious about, a repeat of 2022 seems unlikely.
Going into 2022 the market repriced for bad news – and there was certainly no shortage of that. We have seen deteriorating US-China relations and associated tariffs and trade wars; the Covid pandemic and subsequent supply-chain problems; the Russian invasion of Ukraine and intensified pressure on energy resources; and the great resignation and a reduction in the participation rate of workers. In addition, we have seen stickier headline inflation and rising interest rates, expectations for a recession, and in the UK a period of intense volatility as the government and its policies see-sawed.
A different story on inflation and interest rates
Interest rates in the UK, meanwhile, remain a little bit unpredictable following a change in government and a reversal in policy.
Overall, although I don’t expect global rates to come down in 2023, an end to the guessing game about how high they go has the potential to be a positive catalyst (Figure 1).
Figure 1: The majority of developed market central banks (in yellow) expect to reach terminal rate in 2023
Source: Bloomberg, November 2022
A recession playbook with a twist
Trials for the energy transition
Turning to renewables, the Russian invasion of Ukraine has created a dichotomous outcome in Europe. The increase in fossil fuel energy prices will accelerate the energy transition, with a desire to be self-sufficient paramount. However, the energy crisis has also seen the extended use of coal and nuclear plants that were scheduled to close2,. So on the one hand we are taking a step back in terms of carbon reduction policies – out of necessity – but on the other we are seeing increased investment in renewable projects3. This also brings a sensitivity we must be aware of from an ESG (environmental, social and governance) point of view. This crisis has highlighted that if we reduce the supply of fossil fuels, it drives their price higher. Environmentally that may be good, with less energy being consumed because it is expensive. Socially, however, it is problematic because those that are less welloff spend a greater proportion of their income on energy. So we have a huge social negative for what environmentally is a positive.
Conclusion
It is difficult to recall a year in which news has been so sustainably negative as 2022. Looking forward and seeking to make a central case is challenging given the difficulty in calibrating the risk of escalation of the war in Ukraine and its impacts on Europe, or even regime change in Russia. Meanwhile, rising tensions between China and the US have introduced heightened risks for emerging markets and added caution. We believe higher inflation and interest rates will remain part of the economic backdrop in 2023, but stability on these measures should provide some support. The markets did not anticipate the Russian invasion as we entered 2022; it’s possible a similar blind spot occurs heading in to 2023.
In our view we are well-placed to navigate this uncertainty. At Columbia Threadneedle we are globally connected with more than 650 investment professionals based in Europe, North America and Asia4 sharing perspectives across all major asset classes and markets. We look to continuously improve our analysis and research, and our investment approach is underpinned by a culture that is dynamic and interactive, and by processes that are team-based, performance-driven and risk aware. This has allowed us to perform well over the long term, and as we head into 2023 we believe this will continue.
