Yearender 2022: Global crises to keep markets volatile in 2023

The Treasury bond yields may stay close to the present level but the AAA-rated government securities spreads may widen as corporate borrowing costs rise. (Representative image)

A multitude of battles was fought in the calendar year 2022. These battles materially impacted the global markets and investors. Some of the important battles were —

(1) Russia-Ukraine conflict that polarised the global strategic powers, threatening to unwind the post-USSR globalisation of trade and commerce;

(2) Central banks’ battle against the multi-decade high inflation that resulted from the colossal monetary easing and fiscal incentives to mitigate the impact of the Covid pandemic, while keeping the economy from slipping into recession;

(3) China’s continuing battle against Coronavirus that kept a significant part of the country under strict mobility restrictions;

(4) Businesses battle against logistic challenges, supply chain disruptions, and input cost inflation;

(5) Global communities’ battle against Mother Nature, as inclement weather conditions (drought and floods) impacted life in almost all the continents;

(6) Governments’ battle against private currencies (crypto) threatening to replace the fiat currencies as a preferred medium of exchange; and

(7) Investors fought a battle with markets to protect their wealth.

It is likely that most of these battles will continue in 2023 as well. The outcome of these battles will determine the direction of the global economy and markets. However, standing at the threshold of 2023, it appears less likely that we shall see any sustainable resolution to these conflicts in the next twelve months; though it cannot be completely ruled out.

There would be some periods of ceasefire creating an impression that a conflict is close to resolution. These impressions may drive markets higher and make investors buoyant. Nonetheless, a sustainable positive outcome on some of these conflicts will definitely be positive for the global economy and markets.

It is therefore extremely important for investors to maintain a balanced stance. They should stay alert for a significant directional move in the market and avoid committing to a “bullish” or “bearish” stance early in the year.

Outlook for 2023

Global macro environment: The present challenges in the macro environment may persist for the better part of 2023. The present monetary tightening cycle may pause in the first half of 2023, but persistent inflation may delay any easing to 2024. Higher rates may begin to reflect on economic growth, as softening in employment, consumer demand, housing and other data accelerate.

As things stand today, the central bankers shall be able to engineer a soft landing. However, a material worsening of the geopolitical situation or an elongated La Nina condition may cause a faster deceleration in the economy.

A stronger recovery in China and a ceasefire in Ukraine with the easing of NATO-Russia tension could be a positive surprise for the global economy.

Global markets: The current trend in the global equity markets may continue in 2023 also. The developed market equities and industrial commodities may remain under pressure and witness heightened volatility.

The commodity-dominated emerging markets may be highly volatile with a downward bias as commodity prices ease due to demand destruction. Services- and manufacturing-led emerging markets may outperform. Metal and energy prices may continue to ease. Slower global growth may cause a strong rally in bonds and gold prices may end lower.

Indian macro environment: The momentum created by the post-pandemic recovery is slowing down. The Indian economy is likely to grow less than 6 percent in 2023. A sharper global slowdown may actually bring real GDP growth closer to 5 percent in 2023. Though domestic food prices are expected to ease, a weaker rupee might keep imported inflation, especially energy, higher.

The current account may remain under pressure as export demand remains sluggish. Fiscal pressures may increase and it is less likely that the government is able to meet the fiscal responsibility and budget management (FRBM) targets for the fiscal year 2024. Worsening of the balance of payment could pose a major risk, though at this point in time the probability of this appears low.

Indian markets: The benchmark Nifty may move in a wider range of 16,500-20,100. The risk-reward at the present juncture is therefore fairly balanced. The Treasury bond yields may stay close to the present level but the AAA-rated government securities spreads may widen as corporate borrowing costs rise. The rupee to US dollar exchange rate may weaken to the 83-85 range.

Investment strategy for 2023

• Maintain the standard asset allocation with 5-10 percent tactical cash. Standard asset allocation could be different for various investors, depending upon their individual circumstances.
• Moderate return expectations.
• Avoid leverage.
• Wait for a better entry point for fresh allocations.
• Maintain a balanced stance; avoid forming a strong “bull” or “bear” view during the first half of 2023.