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Nicky Maan, CEO of Spectrum Markets, the pan-European trading venue for securitised derivatives, commented on what we can expect in 2023.
‘‘Economic reality is far more complex, narratives that began in 2022 remain unresolved at the outset of 2023 and there are sure to be more unpredictable plot-twists yet to come.
Russia’s illegal invasion of Ukraine which was expected to be short and decisive, has become a long, brutal war of attrition. It has led to shifts in global alliances as the belligerents attempt to shore-up their economies. The invasion is another source of unpredictability that remains unresolved as we enter 2023. Its economic impact has reached far beyond Russia’s borders in the form of pressure on energy prices, the knock-on effects of which we are all familiar with.
Inflation is still well above central banks’ monetary stability targets but falling energy costs could help bring the situation under control. Meanwhile, pressure from consumers is setting a natural limit on price rises: manufacturers and retailers have had two years of blaming pandemic-related supply chain issues for price rises, but this excuse no-longer washes with many consumers who recognise that mitigation efforts during the Covid-19 pandemic have created overcapacity and greater resilience in supply chains.
There was one prediction frequently made in 2022 that was deferred over and over again: while we are undoubtedly experiencing an economic slump, the much-anticipated global recession is yet to materialise. In 2023, there are signs that it may be avoided altogether. In the US, a competitive labour market is putting upward pressure on wages, which could encourage greater consumption and reduce the risk of recession. Europe’s dependence on Russian gas puts it in a weaker position, but recession is far from inevitable and there is growing expectation that any recession is likely to be brief.
I have only discussed the biggest known, unresolved sources of volatility, but the main takeaway is that even when events occur exactly when they have been predicted to occur, their impacts can still be uncertain and their long-term consequences unresolved. Energy prices, supply chain disruption, inflation, war, climate emergency and public health will, of course, have different and difficult to predict impacts on each part of the economy. As ever, keeping a diverse range of investments is a proven method of protecting against these variables. And investors taking a long-term view may want to explore sustainability and ESG-focused investments, which could become the safe-haven investments of the future.
Lastly, expectations of long-term inflation and recession have been in the positionings market for some time now. And in the face of falling growth, whether it formally qualifies as a recession or not, there is the long-standing advice to engage in defensive, non-cyclical sectors. However, it may be worth not just buying into non-cyclical sectors but acting anti-cyclically in the first place. Investors with sufficient risk appetite and risk-bearing capacity may explore short-term opportunities via leveraged products in order to adequately benefit from price fluctuations in an environment of continued volatility. The outcome of either approach will depend upon whether the current downturn is followed by a sharp rebound, or long and slow path to recovery.’’
