2023 will see: concatenation of risks and disruptions and a rising risk of stagflation. Persistent investor uncertainty. China’s growth story in disarray. The tech finance model in shreds – capital has lost patience. The state’s role on the rise. Nature becoming business and investor relevant. Plus other rays of hope: populism reaching its zenith? 

  • CONCATENATION OF RISKS AND DISRUPTIONS – In 2023, risks, rather than abating, will continue to conflate, reinforcing each other, amplifying their effects, and generating much turbulence and disruption in the process. The constant concatenation of (1) economic, (2) environmental, (3) geopolitical, (4) societal and (5) technological issues is a defining feature of today’s world, with the emergence of new risks in each of the 5 amounting to a relentless source of shocks. These are often unanticipated because too many analysts are cloistered in the silo of their own discipline. Russia’s war is a case in point. Almost no one in the markets saw it coming (many political analysts did but were ignored), resulting in the failure to think through the consequences on commodities price inflation and the subsequent effect of this on political and social stability.
  • EXPANDING STAGFLATION RISKS – Advanced economies are now operating within a radically new framework: ultra-loose fiscal and monetary policies have ended against the backdrop of an unprecedented high level of public and private debt (350% of global GDP versus 200% in early 2000 – a lot of which to finance consumption rather than investment). With inflation back and central banks seemingly determined to keep raising interest rates, there are no cuts (yet?) in sight to stimulate demand. As risk concatenation creates more ‘potholes’ along the way, non-economic risks like geopolitical turmoil, rising nationalism or the environmental crisis will keep (1) causing negative supply shocks and (2) hitting growth. As a result, in 2023, the risk of stagflation (i.e., low GDP growth combined with elevated inflation) will be greater.
  • PERSISTENT INVESTORS’ UNCERTAINTY – After last year’s financial debacle that affected almost every single asset class (commodities were the exception), investors are divided and often bearish about what’s coming next. This is epitomized in the forecasts of the world’s most followed index: the S&P500 (which closed 2022 at 3,839, down 20% Y-o-Y). A month ago, strategists thought at one extreme that it could rise by 10% and at the other that it could fall by 17% – a vast and rare disparity that reflects the deep uncertainty regarding the course of monetary policy and corporate profits in the coming months.
  • CHINA’S GROWTH STORY IN DISARRAY – The last Chinese bulls (like Steven Roach) have now thrown in the towel. It seems impossible that China could succeed in transitioning from: (1) exports and investment to consumer-led growth, (2) surplus saving to saving-absorption by investing in a decent social safety net, (3) manufacturing to services, and (4) foreign to domestic innovation. All 4 are required to achieve a structural rebalancing of the economy and generate sustained growth. But the abandoning ‘0-covid’ policy shows that Xi Jinping excelled at control but not governance. His total centralisation of power is ill-placed to rebalance the economy and stimulate productivity.
  • NATURE TO BE AS BUSINESS & INVESTOR RELEVANT AS THE CLIMATE EMERGENCY – Nature (the flip side of the environmental coin) is at last getting more recognition: at COP15, 196 countries agreed to set biodiversity targets for 2030, requiring that both large companies and financial institutions disclose their biodiversity impact. As it is for the climate, taking into account and pricing such externalities is going to be a long and arduous process, but at least the direction of the trend is clear. There are currently 1,100 climate funds with $350bn in assets but only 14 natural capital funds managing a total of less than $2bn. Since protecting biodiversity is an effective way to control and reduce carbon emissions, the catch-up will take place more rapidly that most investors assume. To get a sense of how fast this is going, we invite you to get involved in our good4nature initiative.
  • CAPITAL HAS LOST PATIENCE – Rising interest rates sound the death knell of the big tech model, prompting investors no longer to believe in the promise of growth over earnings. The index of unprofitable tech companies is down 77% since its Feb. 2021 peak and is unlikely to recover any time soon. In 2023, investing in the real economy and what truly matters to our lives (like green tech and health) will gain prominence over investing in the ‘convenience’ promised by big tech. This will favour private investors: contrary to big tech, this is not about scaling fast and benefitting from network effects, but dealing with the real issues of competition, regulation, and all kinds of ‘stuff’ in the physical realm. This takes time, and contrary to big tech, there is no ‘winner-takes-all’ in the real economy. Owners of Tesla (stocks not cars) and equivalent: beware.
  • THE RISING ROLE OF THE STATE – As we anticipated in The Great Reset (co-written with Klaus Schwab), a host of motors are driving an expansion of the role of the state. They range from (1) the political necessity to mitigate the pain of brutal crises (as for the pandemic or energy prices) to (2) higher costs associated with structural issues as different as an ageing population or rising health and military expenditure, and (3) the rising recourse to industrial and trade policies. As government spending increases, so will wealth, corporate and other taxes. For global investors, the conjunction of economic nationalism and big government capitalism means that the road ahead will be sinuous and harder to navigate.
  • GOOD THINGS THAT MIGHT HAPPEN IN 2023 – It’s important not to be overwhelmed by all the ‘bad stuff’ going on. There are some major rays of hope discernible. Two in particular: (1) In geopolitics, the myth that autocrats “get things done” is now shattered and the wave of populism that started less than 10 years ago may have reached an inflexion point. Prominent populist strongmen (whether it’s Donald Trump or Xi Jinping) suddenly look weaker. With this autocratic retreat, the ‘West’ is back with a new sense of unity propelled by Putin’s tragic miscalculation. (2) Tech remains a powerful source of optimism. The pace of progress in areas such as green tech and cancer vaccines is stunning. Even nuclear fusion is now making progress!
  • For an in-depth proprietary analysis of any of the bullet points and what they mean for you – please contact us. We provide tailor-made, independent research, with insights and actionable ideas based on a rich and diverse network. Details HERE.