5 reasons 2023 will be a difficult year for global markets

Those who come with warnings rarely become popular. Cassandra did herself no favors when she told her fellow Trojans to beware the Greeks and their wooden horses. However, as financial markets face unprecedented turbulence, it is important to take a hard look at economic realities.

Analysts agree that markets face serious headwinds. The International Monetary Fund has predicted that in 2023, one third of the world economy will go into recession. Energy is in high demand and in short supply, prices are high, and emerging and developing economies are emerging from the pandemic in shaky conditions.

There are five key and interrelated issues that pose challenges for asset markets in 2023, recognizing that there are no clear options for investors in uncertain environments. Every decision requires a trade-off.

Net energy deficit

Unless there are dramatic changes in the geopolitical and economic landscape, fossil fuel shortages will continue well into next winter.

Sanctions related to the war in Ukraine have cut off Russian supplies, and Europe’s energy architecture has been irreparably damaged by an explosion that destroyed part of the Nord Stream 1 pipeline. This is irreversible because building new infrastructure takes time and money, and ESG mandates make it difficult for energy companies to justify large-scale fossil fuel projects.

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Meanwhile, already strong demand will only pick up once China emerges from the COVID-19 slowdown. Record growth in renewables and electric vehicles has helped. But there are limitations. Renewable resources require hard-to-source elements such as lithium, cobalt, chromium, and aluminum. Nuclear will ease pressure, but bringing new plants online takes years and public support can be difficult to garner.

Recovery of production

Supply chain shocks from the pandemic and Russia’s aggression in Ukraine have fueled appetites in major economies to restore output. While this can bring long-term benefits to domestic growth, restoration requires investment, time, and the availability of skilled labor.

In the short to medium term, the recovery of jobs from cheap offshore locations will feed inflation in high-income countries as it raises wages for skilled workers and reduces corporate profit margins.

Transition to commodity-based economies

The same disruptions that led to the recovery trend have led countries to seek safer and greener raw material supply chains within their own borders or within the borders of allies.

In recent years, the extraction of important rare earths has been outsourced to countries with abundant cheap labor and lax tax regulations. As these processes move to high tax and high wage jurisdictions, the supply of raw materials must be reconsidered. In some countries, this will lead to increased investment in exploration. For those unable to obtain goods at home, this may result in a change in trade alliances.

We can expect such alliances to reflect a geopolitical shift from a unipolar to a multipolar world order (more on that below). For example, many countries in the Asia-Pacific region will prioritize China’s agenda over that of the United States, affecting US access to goods now sourced from Asia.

Persistent inflation

Given these pressures, inflation is unlikely to slow down anytime soon. This poses a major problem for central banks and interest rates, their convenient tool to control prices. Higher borrowing costs will have limited power now that we have entered a period of secular inflation with supply/demand imbalances resulting from de-globalisation.

Twelve-month percentage change in the Consumer Price Index (CPI), 2002-2022. Source: Bureau of Labor Statistics

Past periods of inflation have ended with prices rising to unaffordable levels, leading to demand collapse (demand destruction). This process is straightforward when it comes to discretionary purchases, but problematic when it comes to necessities like energy and food. As consumers and businesses have no alternative but to pay higher costs, there is limited scope to reduce the upward pressure, especially with many governments subsidizing consumer purchases of these essential goods.

Accelerating decentralization of key institutions and systems

This major change is driven by two factors. First, the realignment of the geopolitical world order has been affected by disrupted supply chains, tight monetary policy, and conflict. Second, the global erosion of trust in institutions as a result of the chaotic response to COVID-19, economic hardship and widespread misinformation.

The first point is key: Countries that once looked to the United States as an opinion leader and enforcer are questioning that fit and filling the void with regional ties.

In the meantime, mistrust of institutions is growing. A Pew Research Center poll found that Americans are increasingly suspicious of banks, Congress, big business and health care systems — and even each other. Growing protests in the Netherlands, France, Germany and Canada, among others, make it clear that this is a global phenomenon.

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Such discontent has also led to the rise of far-right populist candidates, most recently in Italy with the election of Giorgia Meloni.

This has also led to increased interest in alternative ways of accessing services. Homeschooling has accelerated during the pandemic. Then there is Web3, designed to provide an alternative to traditional systems. Take the work in the Bitcoin (BTC) community for the Beef Initiative, which seeks to connect consumers with local farmers.

Historically, periods of extreme centralization have been followed by waves of decentralization. Think of the breakup of the Roman Empire into local tribes, the revolutions of the 18th and early 19th centuries, and the rise of antitrust laws in the West in the 20s. Everyone saw the disintegration of monolithic structures into their component parts. Then the slow centralization process began again.

Today’s transition is accelerated by revolutionary technologies. While the process is not new, it is disruptive to both markets and society. Markets ultimately thrive on the ability to calculate outcomes. This becomes increasingly difficult to do as the foundation of consumer behavior undergoes a phase shift.

Taken together, all these trends point to an era in which only the careful and opportunistic investor will thrive. So fasten your seat belts and get ready to travel.

Joseph Bradley is head of business development at software-as-a-service Heirloom. He began his career in 2014 as an independent researcher in the cryptocurrency industry before joining Gem (later acquired by Blockdaemon) and later transitioning into the hedge fund industry. He earned his master’s degree in portfolio construction/alternative asset management from the University of Southern California.

This article is for general information purposes and should not and should not be construed as legal or investment advice. The views, opinions and opinions expressed herein are solely those of the author and do not reflect or represent the views and opinions of Cointelegraph.

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