2023 Winners and Losers – Brightening Outlook in a Changing World OrderOutlook

  |   Geopolitics, Macro

2022 was a year of extraordinary surprises for politicians, businesses and investors resulting in a ground-breaking divide, with winners such as Joe Biden, Volodymyr Zelenskyy, Ursula von der Leyen, Jens Stoltenberg, Luis Inácio Lula da Silva and Mohammed bin Salman and on the losing side the likes of Vladimir Putin, Xi Jinping, Jair Bolsonaro and Ali Khamenei.

Comeback of Global Cooperation and Revival of Animal Spirits

We expect 2023 to be dominated by a new pragmatism and opportunism marked by a back-to-business and deal-making mentality on sovereign and corporate levels alike. Be prepared for more exogenous and endogenous risks but also watch out for unprecedented entrepreneurial and investment opportunities in public and private markets alike, as we are living through a transformational decade paired with coincidentally cyclical and structural forces, reengagement yet recalibration of globalization, the fight against climate change, and progress in digitalization and artificial intelligence.

Key Themes for 2023

  • The US presidential pre-election year
  • China’s post-COVID opening
  • Europe/Russia and a new security order
  • Disinflation cycle in capital markets
  • Energy transition and Petro-Yuan

Throughout 2022 we have seen novel yet crucial geopolitical and economic developments favourable to the 2023 risk assets’ outlook. Decision makers will have to rise to the task of mitigating negative surprises while capturing new opportunities.

The US is the Geopolitical Winner

Joe Biden was not biding and Donald Trump surely not trumping in 2022. The largely underestimated yet hugely successful US President Joe Biden ticked practically all boxes last year: US strategic autonomy was strengthened, transatlantic relations and NATO were revived, Trump lost the US mid-term elections, the US institutional framework and political centre was reinforced, Russia ended up cornered and isolated, China contained and major US legislative achievements, the USD, as well as the financial system reigned supreme. And remember, 2023 is a US Presidential pre-election year which typically bodes well for an expansionary economic and rising capital market outlook.

China 2023 – The Big Game Changer

The Chinese Communist Party finally owned the disastrous and unsustainable no-COVID policy resulting in a clear face loss for Chinese President Xi Jinping and forcing him to turn around his public health policies including quarantines, travel restrictions and locks-downs. China’s approach is now to re-focus on economic growth, business and re-engagement with the West on commercial grounds. The respective positive implications for the global economy and financial markets are hugely relevant and still not adequately recognized. The way forward is threefold, depending on one’s risk appetite and capacity, to play the unleashing of huge pent-up Chinese consumer demand: directly investing in Chinese risk assets; put your money into South East Asia; or allocate it into the European branded ‘luxury & lifestyle’ sector.

Russia’s War in Ukraine – Miscalculations Multiplied

The Russian President won’t back down, that much is clear, resulting in geopolitical, military, energy and economic confrontations between the West and Russia in a deadlock and/or escalating. Russia, however, is doomed and Putin cornered, facing a determined Ukraine, a united and vastly superior West while China and India remain intent on containing the war to focus on economic growth and business. We don’t expect any resolution to the end of the war in Ukraine in 2023. Putin actions, on the other hand, will grow ever-more desperate in the wake of the upcoming Russian presidential elections in March 2024, in which he will face not only growing domestic resistance against the war but also backlash from ultranationalists blaming him for his failure in the battlefield.

Normalizing Monetary Policy in Non-Normal Times

Central banks, led by the FED, are determined to restore lost credibility, prepared to overshoot. Painful real economic effects of significantly higher interest rates are lagging and, as a result, the corporate and property sectors remain on a challenging trajectory. Don’t wait for the FED to pivot as this will only happen in a situation in which financial system stability is endangered. The FED will far more likely reduce tightening monetary policy in line with weakening labour market and inflation data. We expect normalization of monetary and interest rate policy in 2023 which is a much needed and welcome development in the medium- to long-run.

Active Management for Total Return will Rule

Cash was king in 2022 – but no longer in 2023. Risk assets move in fear & greed cycles, as we know, from fear, capitulation, hope, optimism to euphoria – in other words, from overshooting to undershooting in prices and valuations. Financial markets and yield curves look ahead and discount future developments. Thus, equity markets reflect fears and worries well ahead of actual economic pains, recessionary troughs or corporate distress and defaults. Equities are the major beneficiaries of the next disinflationary cycle which has already started. Consequently, we advocate a renewed and steady increase in risk exposures to global equity markets. After decades of sailing with the tailwind of Beta performance, we are convinced that Alpha oriented active investment management and dynamic asset allocation will continue to have a big comeback.

Investment Favourites – ‘European Luxury & Lifestyle’, US Financials and Global Energy

Structural growth in European ‘luxury & lifestyle’, early-cycle and low-valued US financials and indispensable global energy are our favourite sectors. Geographically speaking the US and South East Asia remain dynamic and promising and long-term holdings in Western high-quality multinational firms will continue to be attractive. Key performance drivers, however, are the unleashing of the Chinese consumer and economic turnaround, the booming Middle-East with the Saudis holding the best cards, the topping USD and declining inflation momentum – all reigniting world trade and the emerging markets‘ economic and capital markets outlook, just watch the rapidly improving fortunes of the KOSPI and Hang Seng Indices for that matter.

Key Risks and Wild Cards for 2023

A fatal combination of illiquidity with leverage and policy mistakes could lead to a major distress and default situation, resulting in, albeit temporary, financial system instability. In geopolitics and geoeconomics the chances of multiple and compounded miscalculations of rogue states might trigger intended and unintended grave consequences.

Best wishes for the New Year!

Article by Beat Wittmann, Chief Investment Strategist at Key Family Partners SA