4 reasons why 2023 will be a difficult year for global markets



by   |  VIEW 268

4 reasons why 2023 will be a difficult year for global markets

In the near future, analysts predict that markets will face serious headwinds. One-third of the world's economy will be in recession by 2023, according to the International Monetary Fund. There is a high demand for energy, it is in short supply, prices are rising, and emerging economies are returning to normal in volatile conditions following the pandemic.

As asset markets face several fundamental and interrelated issues in 2023, there are no clear alternatives for investors in uncertain environments. There is always a compromise involved in every decision.

Lack of energy

Without dramatic changes in the geopolitical and economic landscape, fossil fuel shortages seem likely to persist well into next winter.

Russian stocks were reduced by sanctions related to the war in Ukraine, while Europe's energy architecture suffered irreparable damage when an explosion destroyed part of the Nord Stream 1 gas pipeline. The damage caused is irreparable because building new infrastructure takes time and money, and ESG mandates make it difficult for energy companies to justify large fossil fuel projects.

Reshoring – returning production to the home country

Supply chain shocks caused by the pandemic and Russia's invasion of Ukraine have fueled the appetite in major economies to shift production. While this could prove to be a long-term boon for domestic growth, re-positioning requires investment, time, and the availability of skilled labor.

In the short to medium term, the return of jobs from low-cost offshore locations will fuel inflation in high-income countries as it increases wages for skilled workers and reduces corporate profit margins.

Inflation

Given these pressures, inflation is unlikely to slow anytime soon.

This presents a major challenge for central banks and their favorite price control tool: interest rates. Higher borrowing costs will have limited power now that we have entered an era of secular inflation, with supply and demand imbalances resulting from the unraveling of globalization.

With consumers and businesses having no choice but to pay higher costs, there is limited room to ease upward pressure, especially given that many governments subsidize consumer purchases of essential goods.

Accelerating the decentralization of key institutions and systems

This fundamental change is driven by two factors.

First, a realignment in the geopolitical world order was triggered by disrupted supply chains, tight monetary policy, and conflict. Second, the global erosion of trust in institutions caused by the chaotic response to COVID-19, economic problems and widespread misinformation.

The first point is crucial: countries that once looked to the United States as a leader of public opinion and enforcer of order are questioning this alignment and filling the void with regional relations. In the meantime, distrust in institutions is growing.

A survey conducted by the Pew Research Center showed that Americans are increasingly suspicious of banks, Congress, big companies and health care systems, and even each other. Escalating protests in the Netherlands, France, Germany and Canada make it clear that this is a global phenomenon.