Three systemic risks that await us in 2023
Adjust your asset allocation accordingly… and see you next December to reap the benefits!
The beginning of the year is an opportunity for investors to consider their capital investments and adapt their strategies to the macroeconomic context.
While traditional forecasting exercises about what the markets will do are more entertainment and fortune-telling than financial analysis, taking the time to assess the situation on January 1st is essential to maximizing profits and preventing losses in the market.
Because the years follow each other, but they are not the same. In early 2021, it was necessary to invest in the context of the ongoing pandemic and the strain on international supply chains. At the beginning of 2022, savvy investors were looking into energy issues and expecting shortages (for which the war in Ukraine was only a catalyst, gas prices in Europe began to rise in the summer of 2021).
Here are three major paradigm shifts that could impact our investments in early 2023. For those wondering, a common bailout would be the “threats” or “risks” in the markets that justify parting with its shares.
On the other hand, those who have been waiting for them will see a simple reshuffle of the macroeconomic cards… and an opportunity to profit.
Change n°1: fat shortage soon?
The war in Ukraine continues, and with it, economic tension between Europe and Russia.
To be honest, at the beginning of the year I am more optimistic about our gas supply than I was six months ago. Our economic fabric has adapted painfully, but it has adapted.
Unless we hope for a miraculous recovery of gas-hit companies, those that are still profitable at the end of 2022 should continue to operate in 2023. Their position might even be stronger than a year ago, if some of their competitors had gone bankrupt in the meantime.
On the other hand, the oil supply will be the next crisis to be managed. The Kremlin may cut oil production this year in response to the European Union, the G7 and Australia imposing restrictions on the price of Russian black gold.
However, Russian production (of all oil grades combined) is around 10 million barrels per day (9.7 Mb/s based on consolidated figures for October 2022). Russia is OPEC+’s second largest producer by volume and alone accounts for 10% of global demand.
Let’s be clear: just as we cannot do without Russian gas without major effects on our economy, we cannot do without Russian oil flowing through third countries today.
Natural gas accounts for about 20% of the total energy consumed in Europe, while oil accounts for 36% or 1.8 times more. Therefore, any reduction in availability will have a major impact on our GDP. As with gas in 2022, the least solvent buyers risk being sidelined and shutting down all activity in the event of a shortage.
Change n°2: decent liquidity crunch subprime ?
Last month, giant Blackstone had to limit buyout requests for its flagship real estate fund. The CEO made a good game of claiming that the share buyback was due to “investors in financial distress,” a semantic sleight of hand. Confusing cause and effect is a well-worn fallacy, and Blackstone’s emergency withdrawal cap is a problem in itself—whatever the cause.
A few months ago we witnessed a real bond crash in the UK. On September 27, the British 30-year bond (Gilt) showed a morning yield increase of 115 basis points. Of course, the Bank of England brought out its heavy artillery and quickly reassured the markets… but the damage was done and Gilt was back to roughly the same level a few weeks later.
The evolution of 30-year British government bond yields. Flash crashes only confirm the underlying trend. Source: Marketwatch.com
The youngest analysts who have not yet experienced a major financial crisis will see epiphenomena in these two anecdotes… Those who remember past crises know that, by definition, the weakest links in the economic chain crack first.
Bond market stress, fund managers unable to meet demand: this is a sure sign of liquidity drying up.
In 2023, despite inflation, money will be expensive. It is never a good idea to cancel all your positions and be cash onlysaving money so you can buy paper at a good price can be a winning strategy over the next six months.
Change n°3: Living without ECB?
Another contextual shift that an entire generation of investors and decision makers has not known how to deal with: the disappearance of the buyer-of-last-resort role for central banks.
After almost 15 years of monetary “whatever it takes”, the financial sphere has become accustomed to relying on the ECB to maintain the stability, if not the steady rise, of asset prices.
In these columns, we do not fail to mention the crucial role that bribery played in the creation of the “everything bubble” that caused the prices of stocks, bonds and also real estate all over Europe.
But this free money also acted as an anesthetic for citizens, investors and leaders. By raising prices almost permanently and gradually lowering the value of money, the ECB has come up with a strategy that wins every time: sell volatility and increase debt.
Over time, economic players began to naturally integrate this mode of operation. And a whole generation of analysts, investors and even politicians even see this as the way a normal economy works.
Historically, this has not been the case, and 2023 may be the year of a return to classical operation.
This year, eurozone countries will have to borrow like never before. Debt issues on the old continent should exceed 1,200 billion euros. On the private players’ side, over-indebted companies – some for the first time – will come up against the refinancing wall and see their banks refuse to add debt to their debt. Mortgage borrowers among individuals will increase the number of denials, causing demand to dry up.
This growing tension will surprise those who think 2010-2020 is the new normal. Financial schemes based on a house of easy money cards (like the French state budget) will collapse. It’s time to go back to our parents’ investment methods. Not because they have been gifted with a wisdom that we lack, but because 2023, financially speaking, is more like the last century than the 2000s.
If you anticipate these three factors, you will increase your chances of going through 2023 without any obstacles.
Just adjust your asset allocation accordingly… and see you in December to reap the rewards!
