2023 outlook: four key trends

Wednesday 4 January, 2023

In summary

• 2022 saw a shift in the investment landscape from ‘easy’ money to central banks combatting surging inflation

• Supply chain disruption from a move away from globalisation as well as climate change adaptation will impact businesses globally

• Monetary policy to remain tight for the foreseeable future

Over the course of 2022, we saw the investment landscape shift away from the low interest rate environment of the 2010s into a swift reversal. Rising interest rates, market volatility and inflation, driven by a variety of factors including a war in Europe, has been a recipe for a tough investment environment. Below, we review the key themes we see influencing financial markets in the year ahead.

The rise of fringe-shoring

The war in Ukraine has exacerbated the fragility of global supply chains, previously exposed by the US-China trade war and the pandemic. This has forced countries to onshore (bringing supply chains back into the domestic market) or near-shore/fringe-shore (moving supply chains to nearby countries). Both trends point towards a period of deglobalisation, and we could see this work its way into an investment theme for the future. In his 2022 annual shareholder letter, BlackRock’s CEO Larry Fink said the invasion of Ukraine has finally ‘put an end to globalisation’. 

Climate change adaptation 

Across the world, business models and supply chains are being disrupted by climate change. From inability to transport goods along rivers, to lack of water impacting industrial processes such as production of semiconductors, to dramatic reduction in agricultural yield. Businesses that are not sufficiently insulating themselves against these risks, which impact every sector across the globe, will be the ones that will be left vulnerable.

Monetary policy 

Monetary policy across the globe has diverged somewhat over the course of 2022. In the US, the Federal Reserve (Fed) adopted an aggressive tightening stance, racing to move from behind the curve to restrictive levels. In the UK, the Bank of England raised rates seven times over the past year but faces challenges to go much further given the cost-of-living crisis. The European Central Bank has indicated that it will continue raising rates to combat the energy crisis across the EU. Up until December 2022, Japan maintained its policy stance, but the Bank of Japan have started to loosen their grip on their current yield curve control policy. On the other hand, monetary policy continues to remain loose in China. 

Earnings resilience and quality

Looking forward, we believe a focus on earnings resilience and rock-solid balance sheets is imperative. The end of ‘cheap’ money will likely result in a survival of the fittest – those that survive will be companies with quality characteristics, robust business models, earnings stability and persistent cash flows. There remains hope that the US may still avoid a recession, the so-called ‘soft landing’ scenario, but even in this scenario corporate earnings could still be challenged. 

Important information

This communication is provided for information purposes only and is intended for the exclusive use of the recipient to whom it has been directly delivered by Lonsdale Services and is not to be reproduced, copied, or made available to others.  The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation, or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy.  Past performance is not an indication of future performance and the value of investments, and the income derived from them may fluctuate and you may not receive back the amount you originally invest

Although this document has been prepared on the basis of information, we believe to be reliable, Lonsdale Services gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by Lonsdale Services, employees, and associated companies for any direct or consequential loss arising from this document.

Lonsdale Services is authorised and regulated by the Financial Conduct Authority

Latest News Next Article Previous Article