A dealer works on the ground of the New York Inventory Change (NYSE) in New York Metropolis, August 29, 2022.
Brendan McDermid | Reuters
After a tumultuous yr for monetary markets, Commonplace 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, mentioned outsized market strikes are more likely to proceed subsequent yr, even when dangers decline and sentiment improves. He warned buyers to organize for “one other yr of shaken nerves and rattled brains.”
The largest shock of all, in line with Robertson, could be a return to “extra benign financial and financial-market circumstances,” with consensus pointing to a worldwide recession and additional turbulence throughout asset lessons subsequent yr.
As such, he named eight potential market surprises which have a “non-zero likelihood” of occurring in 2023, which fall “materially exterior 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.
Nevertheless, Robertson urged {that a} deeper-than-expected world recession, together with a delayed Chinese language restoration on the again of an surprising surge in Covid-19 instances, might result in a “important collapse in oil demand” throughout even beforehand resilient economies in 2023.
Ought to a decision of the Russia-Ukraine battle happen, this might take away the “war-related danger premia” — the extra charge 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 line with Robertson’s checklist of “potential surprises.”
“With oil costs falling rapidly, Russia is unable to fund its army actions past Q1-2023 and agrees to a ceasefire. Though peace negotiations are protracted, the top of the warfare causes the danger premium that had supported power costs to vanish utterly,” Robertson speculated.
“Danger associated to army battle had helped to maintain entrance contract costs elevated relative to deferred contracts, however the decline in danger premia and the top of the warfare 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 stage of round $79 per barrel to simply $40 per barrel, its lowest level because the peak of the pandemic.
Fed cuts by 200 foundation factors
The primary 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 charge from a goal vary of 0.25%-0.5% at first of the yr to three.75%-4% in November, with an additional improve anticipated at its December assembly. The market is pricing an eventual peak of round 5%.
Robertson mentioned a possible danger for subsequent yr is that the Federal Open Market Committee now underestimates the financial harm inflicted by 2023’s huge rate of interest hikes.
Ought to the U.S. economic 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 line with Robertson’s checklist of “potential surprises.”
“The narrative in 2023 rapidly shifts because the cracks within the basis unfold from probably the most extremely leveraged sectors of the economic system to even probably the most secure,” he added.
“The message from the FOMC additionally shifts quickly from the necessity to maintain financial circumstances restrictive for an prolonged interval to the necessity to present liquidity to keep away from a significant exhausting touchdown.”
Tech shares fall even additional
Progress-oriented know-how shares took a hammering over the course of 2022 because the steep rise in rates of interest elevated the price of capital.
However Commonplace 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 checklist of potential surprises for 2023, Robertson mentioned the index might slide one other 50% to six,000.
“The know-how sector broadly continues to endure in 2023, weighed down by plunging demand for {hardware}, software program and semiconductors,” he speculated.
“Additional, rising financing prices and shrinking liquidity result in a collapse in funding for personal firms, prompting additional important valuation cuts throughout the sector, in addition to a wave of job losses.”
Subsequent-generation tech firms might then see a surge in bankruptcies in 2023, shrinking the market cap share of those firms on the S&P 500 from 29.5% at its peak to twenty% by the top of the yr, in line with Robertson.
“The dominance of the tech sector within the S&P 500 drags the broader fairness index decrease too,” he urged, including: “The tech sector leads a worldwide fairness collapse.”
