What to expect in 2023?

In 2022 the bond market experienced its worst year in history. The growth stocks that have driven equity market returns since 2008 suddenly ran out of fuel – low-cost capital suddenly disappeared – so leveraged companies came tumbling back to earth on a much lower orbit. Companies that had adapted themselves to these changes companies went and are going under – at least in public markets.

Investors now are settling in for a new world order. But we still need to be careful not to put on the blinkers too quickly. If the past couple of years has taught us anything, it is that surprises come from unexpected places at unexpected times.

Predicting the unexpected is usually an exercise in futility. It is important to remain alert to the possibility of surprises and to challenge widely held assumptions.

Old companies will learn new tricks

We talk a lot about disruptors and their impact on various sectors.

But many of these companies, with their new technologies and their focus on growth over profitability, hit a wall in 2022.

That does not mean that they are dead. Far from it. We need to explore the assumption that old companies cannot adapt. Rising interest rates will increase profitability in the banking sector, making investment in companies more possible.

We have survived by changing, and we will continue to do so. Over the last ten years companies worldwide have focused on developing skills to adapt to change and align themselves with new market realities.

Do not assume they cannot reinvent themselves in a very short time.

What should we expect from China?

It has become fashionable to see China as problematic, but we should not underestimate its impact.

In the 2008 Global Financial Crisis, it was the extensive fiscal stimulus from the Chinese that pulled the whole global economy out of recession.

The Chinese economy is much bigger today – it has trebled in size since 2008. The strict zero-tolerance Covid regime has had a huge impact and suppressed the demand side of the equation globally. This is now ending and China will be back on the global stage again.

And China needs not to bounce-back very strongly for the world to feel the impact.

That said, we must assume the Chinese have depressed demand, as in the western world. Therefore, a bounce-back may be stronger than we imagine. This should be positive for the global economy and especially positive for Asia – but not so good for inflation. Economics is never simple!

A positive year for Japan

For years, we have been trying to spot rays of light amid the economic gloom in Japan and we questioned why they call themselves the “Land of the Rising Sun”.

Stagflation, a shrinking population and outdated corporate practices have meant Japan has been a great disappointment.

But can we envisage that story changing in 2023. It still is the world’s third-largest economy. The weakness of the yen is good for manufacturing. Japan could be a massive beneficiary of a more prosperous Asian economy. It has experienced a lot of corporate reform that should make it better placed to succeed.

And this is one country in the world that would embrace a bit of inflation.

Global Productivity will pick up

There is always the issue of global productivity in the background. Why is it that we have lived through a decade of enormous technological advances yet seen little improvement in productivity?

The issues we are facing now in the economy could well change that.

Rising wages in a world with relatively low unemployment incentivize investment in automation and technology. Rising prices drive us to look for efficiencies, and they incentivize those giant organizations to adopt radical new technologies more widely.

There may be a productivity boom just ahead of us. That should feed into higher profits and, ultimately, higher dividends and share prices.

So… keep an eye out for those surprises

I realise the analysis I present here is all generally positive, and maybe that is what I want to challenge – the widespread belief that 2023 will be bleak.

It still might be, but after the surprises of the past two years, it would be nice to have some pleasant ones.