Q1 2023 Outlook The Models are Broken

An Executive Summary

In the introduction to this outlook for early 2023, Saxo CIO Steen Jakobsen argues that our economic models and our assumptions for how market cycles are supposed to work are simply broken. And so should they be, as why should we even want to return to the ‘model’ of central banks engaging in moral hazard and bailing out incumbent wealth, rentiers and risk takers, the rinse-and-repeat we have seen in every cycle since Fed Chair Greenspan bailed out LTCM in 1998? This new post-pandemic and post-Ukraine invasion era we find ourselves in has brought an entirely new set of imperatives beyond bailouts and reinflating asset prices. Instead, we need to brace for the impact of higher inflation for longer as we scramble for supply chain reshoring and redundancy, and as we transform our energy systems to reduce reliance on fossil fuels and reduce our impact on the climate. And it won’t be all pain for all assets. Quite the contrary; it will bring a refreshing return of productive investment and a brighter future for everyone. 

The return to more productive deployment of capital will have to mean investing more in the real, physical world to accomplish the new set of supply chain and resource access imperatives, not pouring money into digital platforms that capture excess profits by monopolising markets and user attention. On that note, our equity strategist Peter Garnry looks at whether the multiple decades of underperformance for equities dealing in tangible assets is ending, with intangibles and financials set to underperform after decades of excess financialisation. He also pokes into the geographies that look the most interesting as supply chains diversify. 

Our macro strategist Christopher Dembik notes that the worst outcomes for Europe in the wake of the EU shutting itself off from cheap Russian energy were thankfully not realised. Danger and opportunity lie ahead for Europe, which faces the steepest challenges in the new world order, but where the sense of crisis will bring the needed change the quickest. As well, Europe is set to benefit from China, its largest trading partner, coming back online this year. Our market strategist for Greater China, Redmond Wong, looks at where the most potential lies in Chinese equities after China executed a seeming total about-face in its zero-Covid tolerance and other policies that cracked down on the property and technology sectors and were presumed to be the hallmarks of rule under Xi Jinping. Charu Chanana, our market strategist in Singapore, picks up on the rest of Asia, weighing the relative value across several Asian markets. She argues that India and also the traditional exporters will benefit both from renewed demand from China and from investment by both China and OECD countries looking to leverage production – and supply chain diversification potential.

In commodities, Ole Hansen looks at the potential for the extension of a bull market in industrial metals as China, the world’s largest commodity consumer, returns in force from lockdowns and not least, as the metal-intensive investment in green energy deepens. The end of China’s lockdowns will also boost crude oil demand by the most in years as China normalises air travel levels. On the supply side, the avoidance of Russian crude and the end of risky, massive drawdowns of much of the US strategic reserves will weigh. Gold could be set to thrive with a turn lower in the USD, but also as a growing roster of countries looks for alternatives to the greenback for maintaining reserves and conduction trade outside the USD system. Our strategist in Australia, Jessica Amir, breaks down what Australia has to offer as a formidable exporter of resources and list of Australian resource companies involved in everything from the EV-battery supply chain to iron ore and gold.

With the return of solidly positive interest rates after the seeming endless years of ZIRP and NIRP, especially in Europe, Peter Siks of our CIO office looks at a far better expected return for the traditionally balanced portfolio. This is somewhat ironic, given that 2022 offered the worst nominal returns for traditionally ‘balanced’ stock and equity portfolios in modern memory.

FX strategist John Hardy looks at the potential for a turn lower in the USD this year and the likelihood of a much stronger JPY in the first half of the year, chiefly driven by its late-comer status to the central bank tightening party and the exit. Finally, crypto strategist Mads Eberhardt sees the risk of more challenges ahead for crypto, particularly the smaller cryptocurrencies as retail participation risks continuing to wither, even as the longer term prospects will brighten in line with the deepening institutional participation in the space in coming years.

We wish you a safe and prosperous 2023.  We strongly believe that markets and the global economy are entering a new era. It won’t be an easy transition, but all great transitions bring exciting new opportunities for those willing to walk away from the old assumptions and to look at how their investments and efforts can contribute to the new world taking shape before us.