2022 Review & 2023 Market Outlook

Now that we’ve said farewell to 2022 and begin to consider the year ahead, it is always helpful to reflect on the past months which have shaped global markets and use the added benefits of hindsight to project valuable perspectives on making informed forecasts on the trends that may shape financial markets in 2023.

Some of the key events that affected the markets in 2022 include the war in Ukraine, the sky-high inflation this and the post covid world contributed to, and the return of market fears on the coronavirus pandemic ending the year. While some of the trends to look out for this year, include projections on the energy crisis with a particular focus on commodities, increased geopolitical influence on financial markets and what central banks plan to do about it seem to also be major trends of the year ahead.

War in Ukraine

The optimism of the beginning of last year was quickly overshadowed by the outbreak of war between Russia and Ukraine, the first-time armed conflict surfaced in Europe for over 70 years. The conflict sent prices of WTI oil and natural gas soaring, and it quickly became clear that one of the main themes for the year would be the western world’s frantic scramble to find alternatives to Russian gas. Policymakers eventually placed a price cap, though hindsight has revealed this has done little to hinder the energy crisis.

Inflation sparks fears of recession

Inflation rates around the globe rose as energy costs did, leading to an international cost of living crisis. By March 2022, US inflation reached a peak of 8.5%, while the Euro area’s annual inflation peaked at a staggering 10.6% later in the year. Responding, central banks took decisive decisions to raise interest rates in a series of coordinated monetary policy moves. This included:

·         US Federal Reserve hiked rates by 75 basis points, the highest raise in 28 years

·         Bank of England raised by 25 bps

·         European Central Bank (ECB) ended its long-term quantitative easy programme

Chinese supply side issues hit markets

Another significant moment of the previous year was the closure of Chinese factories due to a series of unfortunate events, notably continued COVID-lockdowns and a drought, aided by anthropological climate change. These supply disruptions came at a particularly challenging time as inflation was cutting into bottom lines. Large US firms who rely on outsourced supply lines saw investor confident fall, with the S&P 500 index dropping 23.9% through the end of September. A combined $3.4 trillion in market value was lost by the tech giants last year, compared to the end of 2021.

New Year Outlook

A key trend, therefore, for the upcoming year is continued volatility in the financial markets. Though, as market participants navigate the negative implications of the energy crisis, inflation rates and geopolitical concerns, some analysts have identified these four themes starting in 2023:

·         Easing of the energy crisis, particularly in commodities

·         Central bank lowering interest rates gradually as inflation falls

·         Investment grade fixed income is increasingly growing

·         Geopolitical tensions in international affairs to continue

Energy Crisis

The rollercoaster ride that energy markets have experienced since the COVID-19 pandemic and the Russia-Ukraine war is expected by many to continue into 2023. Commodity prices are expected to ease this year, however, as the markets recalibrate, some investors expect natural gas, crude oil, and coal prices to decrease in 2023 compared to the average of 2022. As a result, electricity prices may decrease, easing the pressure on the international cost of living. While this is the belief of many analysts, they would also agree that energy prices fluctuate greatly based on unforeseen geopolitical events, and therefore remain speculative.

Central Banks lowering rates

Many central banks have independently published their outlook for the year ahead, which focused on the expected reduced rate of inflation in their markets. While inflation may fall gradually throughout the year, with the ECB projecting a sharp fall to 3.6% by the end of the year, many warn that the GDP outlook, fuelled by the current inflation levels, weak consumer power, and uncertainty, is set to fall sharply. In a recent interview, the IMF's Managing Director, Kristalina Georgieva, warned that the institution expects one-third of the world economy to fall into recession in 2023. Nonetheless, many analysts believe interest rates may peak at 5% this year, although of course, nothing is certain.

Fixed Income increasingly attractive

As we enter 2023 and consider the market events of the past few months, there is a growing opportunity for core fixed income and real assets. It is expected by many that bond markets will perform well this year, as higher yields make them more attractive, and alternatives within fixed income are also expected to do well. Investment strategists are actively considering investment grade fixed income, even in the face of the potential for economic downturns in major economies around the world. This is due to a risk/reward profile that increasingly favours fixed income over global equities.

Geopolitics threatens market stability

As noted above, the events of the previous year caused the resurgence of geopolitical risk in the energy market, causing significant disruptions and challenges for global investors. The weaponization of energy exports by Russia, particularly to European states, combined with retaliatory trade sanctions that impede trade, continue to make energy markets volatile to geopolitical events. Adding fuel to uncertainties, tension escalations between China and Taiwan raise further concerns within Western democratic ministries of their economic preparedness were the situation become more hostile.

Key Takeaways

The financial market is expected to be volatile in the coming year due to ongoing issues such as the energy crisis, inflation, and geopolitical concerns. Four key themes for the year include analyst projections of the easing of the energy crisis and the decrease in commodity prices, central banks gradually lowering interest rates as inflation falls, investment grade fixed income becoming increasingly attractive, and the continuation of geopolitical tensions in international affairs. Of course, these are merely projections and theme areas such as those identified in this article respond sharply to unexpected geopolitical developments, supply chain issues and demand for product categories too.

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It does not take into account your personal circumstances or objectives. Any information relating to past performance of an investment does not necessarily guarantee future performance.

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