Just following the worst year in the global stock market in more than a decade and the unprecedented collapse of the bond market in this century, looking forward to 2023, some people do not intend to take everything for granted. Here are five more troublesome scenarios for investors’ reference.
1. Inflation is entrenched
Matthew McLennan, co-head of the global value team at First Eagle Investment Management, said the bond market’s forecast that inflation would return to normal within the next 12 months might be wrong.
He explained that supply-side pressures such as wage growth and rising energy costs may continue to push up consumer prices. Such risks do exist, and may rule out the possibility that the European and American central banks will promote policy shifts in the middle of next year, which may subsequently drag down stocks and bonds. A stronger dollar means more pain for emerging markets.
McLennan also pointed to rising borrowing costs, which might trigger a recession and affect investors.
2. China’s road to recovery stumbles
Hopes for an end to the world’s second-largest economy’s long-running lockdown have driven China’s stock market to rebound regarding 35 percent from October lows, but that has been accompanied by a surge in infections that has collapsed the healthcare system and economic activity. Hospitals and funeral homes in many parts of China have recently poured in a large number of patients and remains, causing panic in the local area, and the population flow in major cities has also declined.
Marcella Chow, global market strategist at Goldman Sachs, predicts that China’s infection curve will continue to rise and peak a month or two following the Lunar New Year. Even as she hopes the country will successfully reopen, she warns of the risk of the virus mutating.
Furthermore, the rebound in Chinese equities remains fragile, and any prospect of dampened economic activity would dampen demand for commodities, particularly industrial metals and iron ore.
3. Russia-Ukraine conflict worsens
John Vail, chief global market strategist at Nikko Asset Management, said that once the war worsens, or the North Atlantic Treaty Organization (NATO, NATO) intervenes more directly and increases sanctions once morest Russia, the situation may be very unfavorable.
Secondary sanctions on Russia’s trading partners, especially India and China, will amplify adverse effects, such as severely disrupting supplies of food, energy, fertilizers, some metals and chemicals, at a time when the global economy is in deep crisis, Vail said.
Even more worrisome is the threat of Russia using tactical nuclear weapons, which, while seemingly remote, is not entirely unlikely, and might completely disrupt Ukraine’s grain exports.
4. Emerging markets plummet
Many investors expect a strong dollar to reverse in 2023 and energy costs to fall, two factors that might help ease pressure on emerging markets. However, if the action to calm inflation fails, the currency market may have the opposite result, and the intensification of the Russia-Ukraine war may further push up energy costs.
Shane Oliver, head of investment strategy and economics at AMP Services, said: “We might be in for another year of struggling emerging markets. A continued rise in the dollar or a high dollar will not be good for emerging market countries because many countries have dollar-denominated debt .”
5. Resurgence of the epidemic
More contagious or deadly strains of the new coronavirus, or even longer-lived variants of existing strains, might once once more disrupt supply chains, sparking inflation or slowing economic activity.
Marcella Chow, a strategist at JPMorgan, noted that larger, more trade-dependent economies are more likely to feel the impact of the economic hit to growth.
She is currently betting that the epidemic will continue to cool down, and predicts that negative sentiment in the market will focus on investors pricing in a recession in Europe and the United States.
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