After a tumultuous year for financial markets, Standard Chartered outlined several potential surprises for 2023 that it says are being under-priced by the market.
Eric Robertson, the bank’s Head of Research and Chief Strategist, said outsized market moves are likely to happen this year, even if risks decline and sentiment improves. He warned investors to prepare for “another year of shaken nerves and rattled brains.”
In his report, he outlined a series of ‘non-zero probabilities’ that could shake the market this year.
What is a non-zero probability?
A non-zero probability is a likelihood of something happening that is greater than zero. While this is extremely broad – both landing the winning lottery numbers and tomorrow’s sunrise are technically non-zero probabilities – forecasters use the term to predict unlikely events that could happen in the short-to-medium term.
In Standard Chartered’s case, they’ve used the term to talk about possible surprises for 2023 and, unfortunately, they don’t make for pleasant reading.
From sinking tech stocks to collapsing oil prices, here’s a summary of what they believe is being under-priced by the market over the next 12 months.
Tech stocks sink
After tech’s rapid growth since the turn of the century, it’s easy to see why some people believed it would never end.
Yet, 2022 was the first year that tech stocks took a real bash to their value after heavy interest rate rises increased the cost of capital. Unfortunately, Standard Chartered believe this could be only the beginning.
Robertson was more specific, talking about how the falling demand for hardware, software and semiconductors could continue to hit prices, with a worst-case scenario of a 50% index drop to 6,000.
If that played out, then we may see several bankruptcies among next-gen tech companies, with their S&P market cap shrinking by a third to 20%.
That said, the tech market did bounce back slightly before the new year with a Nasdaq 100 surge of 15% between mid-October and December, which made the 2022 losses look less severe.
Even so, the once formidable-looking tech dominance is coming undone and creating shaky market conditions.
Oil prices collapse
The war in Ukraine and the aftermath of the pandemic has had a dire effect on oil prices with constant supply blockages throughout 2022.
Between mid-June and December alone, they dropped by 35%, and only hopes of economic growth in China and OPE+ output cuts stopped the decline from getting much worse.
Yet, in Standard Chartered’s report, Robertson said that the twin threat of delayed growth in China as well as persistent COVID-19 cases there might lead to a “significant collapse in oil demand” in 2023.
But here’s where it gets really grim. A resolution in the Russia-Ukraine conflict would likely lead to a further drop in oil prices. This is because oil stocks would lose their risk premium – the extra rate of return that investors get for taking more risk. If this occurs, they could lose up to 50% of their value, meaning, perversely, the continuation of the Ukrainian conflict is actually in the best interests of investors.
Falling oil prices makes this scenario more likely, as it means Russia receive less money to fund their military excursions, increasing the chances of a ceasefire – a vicious cycle.
If this happens, then the international benchmark for crude oil would decrease from around $80 to just $40, the lowest it’s been since the height of the pandemic.
US Fed cuts by 200 basis points
One of the big mistakes during the period of record inflation in the United States was the US Federal Reserve underestimating rising prices. Jerome Powell, the Fed chairman, even referred to the inflation as “transitory”.
This train of thought led to an increase in the short-term borrowing rate from the target range of 0.25% to 5% to a high of 4% in November. The peak is expected to be around 5%.
Going into 2023, Robertson warned that the Federal Open Market Committee now underestimates the economic damage caused by the huge increases in interest rates.
A deep recession in the first half of the year could lead to further rate cuts of up to 200 basis points by the central bank, causing “cracks to appear in even the most stable sectors of the economy”.
Robertson said that this would force the FOMC to provide liquidity to “avoid a major hard landing”.
Some good news
The above may make for hard reading for those of us who aren’t ardent pessimists, but the outlook isn’t all gloomy.
As mentioned, these are all simply ‘non-zero probabilities’, which means it’s very unlikely that all of them will strike over the next 12 months.
There are also green shoots of good news across the economy. Just a few months ago, the Center for Economic and Policy Research (CEPR) outlined several reasons why 2023 may be the year for a bounceback in economic well-being, ranging from rising wages at the bottom of pay scale to further benefits produced from remote working.
As the old saying goes, prepare for the worst and hope for the best as we start another unpredictable economic year.
