After a tumultuous yr for monetary markets, Normal Chartered outlined numerous potential surprises for 2023 that it says are being “underpriced” by the market.
Eric Robertson, the financial institution’s head of analysis and chief strategist, stated outsized market strikes are prone to proceed subsequent yr, even when dangers decline and sentiment improves. He warned buyers to arrange for “another year of shaken nerves and rattled brains.”
The most important shock of all, in accordance with Robertson, could be a return to “more benign economic and financial-market conditions,” with consensus pointing to a world recession and additional turbulence throughout asset courses subsequent yr.
As such, he named eight potential market surprises which have a “non-zero probability” of occurring in 2023, which fall “materially outside of the market consensus” or the financial institution’s personal baseline views, however are “underpriced by the markets.”
Collapsing oil costs
Oil costs surged over the primary half of 2022 because of persistent provide blockages and Russia’s invasion of Ukraine, and have remained risky all through the rest of the yr. They declined 35% between June 14 and Nov. 28, with output cuts from OPEC+ and hopes for an financial resurgence in China stopping the slide from accelerating additional.
Nonetheless, Robertson advised {that a} deeper-than-expected international recession, together with a delayed Chinese language restoration on the again of an surprising surge in Covid-19 circumstances, might result in a “significant collapse in oil demand” throughout even beforehand resilient economies in 2023.
Ought to a decision of the Russia-Ukraine battle happen, this could take away the “war-related risk premia” — the extra fee of return buyers can count on for taking extra danger — from oil, inflicting costs to lose round 50% of their worth within the first half of 2023, in accordance with Robertson’s listing of “potential surprises.”
“With oil prices falling quickly, Russia is unable to fund its military activities beyond Q1-2023 and agrees to a ceasefire. Although peace negotiations are protracted, the end of the war causes the risk premium that had supported energy prices to disappear completely,” Robertson speculated.
“Risk related to military conflict had helped to keep front contract prices elevated relative to deferred contracts, but the decline in risk premia and the end of the war see the oil curve invert in Q1-2023.”
On this potential situation, the collapse in oil costs would take worldwide benchmark Brent crude from its present degree of round $79 per barrel to only $40 per barrel, its lowest level because the peak of the pandemic.
Fed cuts by 200 foundation factors
The principle central financial institution story of 2022 was the U.S. Federal Reserve’s underestimation of rising costs, and Chairman Jerome Powell’s mea culpa that inflation was not, actually, “transitory.”
The Fed has subsequently hiked its short-term borrowing fee from a goal vary of 0.25%-0.5% initially of the yr to three.75%-4% in November, with an additional enhance anticipated at its December assembly. The market is pricing an eventual peak of round 5%.
Robertson stated a possible danger for subsequent yr is that the Federal Open Market Committee now underestimates the financial harm inflicted by 2023’s large rate of interest hikes.
Ought to the U.S. financial system fall right into a deep recession within the first half of the yr, the central financial institution could also be compelled to chop charges by as much as 200 foundation factors, in accordance with Robertson’s listing of “potential surprises.”
“The narrative in 2023 quickly shifts as the cracks in the foundation spread from the most highly leveraged sectors of the economy to even the most stable,” he added.
“The message from the FOMC also shifts rapidly from the need to keep monetary conditions restrictive for an extended period to the need to provide liquidity to avoid a major hard landing.”
Tech shares fall even additional
Progress-oriented expertise shares took a hammering over the course of 2022 because the steep rise in rates of interest elevated the price of capital.
However Normal Chartered says the sector might have even additional to fall in 2023.
The Nasdaq 100 closed Monday down greater than 29% because the begin of the yr, although a 15% rally between Oct. 13 and Dec. 1 on the again of softening inflation prints helped cushion the annual losses.
On his listing of potential surprises for 2023, Robertson stated the index might slide one other 50% to six,000.
“The technology sector broadly continues to suffer in 2023, weighed down by plunging demand for hardware, software and semiconductors,” he speculated.
“Further, rising financing costs and shrinking liquidity lead to a collapse in funding for private companies, prompting further significant valuation cuts across the sector, as well as a wave of job losses.”
Subsequent-generation tech corporations might then see a surge in bankruptcies in 2023, shrinking the market cap share of those corporations on the S&P 500 from 29.5% at its peak to twenty% by the top of the yr, in accordance with Robertson.
“The dominance of the tech sector in the S&P 500 drags the broader equity index lower too,” he advised, including: “The tech sector leads a global equity collapse.”
