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The markets in 2023 have been as unpredictable as they have erratic. Responding requires expert advice, so we asked CIO’s 2023 Knowledge Brokers for their approach to navigating the tumult.
At the end of 2022, economists predicted a recession by the end of this year. No recession has come, yet many forecasters continue to predict one coming soon, continuing a run of unexpected outcomes. “This year so far has provided a strong example of the value of questioning consensus,” summarized Tim Filla, managing principal in and consultant at Meketa.
Despite no recession yet materializing, the markets have been volatile in recent months and years, due to a variety of global and economic factors.
“Macroeconomic events are extraordinarily difficult to anticipate from an investment standpoint,” shared Brady O’Connell, a consultant and shareholder at Callan. “One of the simplest things an investor can do is establish a long-term investment policy and stick to it, even when conditions are difficult.”
Geopolitics Hold Sway
With war in Ukraine, conflict in Israel and Gaza and tensions rising in the Caucasus and the Pacific, it is clear geopolitical tensions will have market ramifications.
“Unfortunately … we are clearly seeing [political tension and divisions] already, on the global stage but also within nations,” Filla wrote. “Hitting on the theme of the new old normal again, we have all lived in and benefited from a 30-year period of relative peace globally, with conflicts limited to relatively isolated developing nations until last year. In that environment of relative stability, economic globalization accelerated, benefiting developed nations with disinflation and emerging nations with strong economic growth. That period seems in jeopardy, with tensions again rising between larger economic and military powers.”
Geopolitical tensions can affect the prices of commodities, such as oil and gas and rare minerals, as countries use their resources as tools. Semiconductors are one example, with the U.S. attempting to block Chinese access to high quality chips, and China retaliating with export controls on critical semiconductor materials.
“Commodities, beyond oil, will drive increased volatility, given technology expansion and the growing need for minerals,” commented Rowena Carreon, head of advisory solutions at Addepar. “For instance, investors have been considering future access to semiconductor technology and the impact it will have on geopolitical relationships—not only between the U.S. and China, but also across different markets. Technology has become both an equalizer and an accelerant of competition.”
The end of the Cold War promoted global economic growth and cooperation due to rising globalization. However, more modern rivalry between major nations, such as the U.S. and China, could have negative implications for supply chains, the markets and global stability.
“The low volatility of the past will be disrupted as new alliances form, again, both within and between countries,” predicted Samantha Foster, managing director at Russell Investments. “Within countries, we see the politicization of corporations and aid organizations. Across international borders, we see governments restricting capital flows, both into and out of countries. Higher overall uncertainty leads corporations to have wider bands around capital allocation and forecasts, which in turn leads to higher uncertainty in equities, which are central to institutional investors.”
The BRICs bloc has been identified as a possible counterweight to the dollar and the G7. Several energy-producing and resource-rich countries are within this block, and a geopolitical conflict could put stress on multiple industries, including energy.
“New alliances are forming, and the expansion of the group of emerging market growth countries that initially included Brazil, Russia, India and China will have consequences to their continued influence in the world order,” Carreon anticipated. “The inclusion of Saudi Arabia and other energy producers in that group will impact pricing dynamics and the economies reliant on them.”
Time to Adapt
Until recently, investors enjoyed a long-term bull market during a low-rate environment. With inflation and rate hikes prevalent over the last year, investors may have to change their approach.
“Institutional investors are going to have to unlearn the lessons of the past 15 years,” noted Ryan McGlothlin, managing director at Agilis. “Following the global financial crisis of 2008 and 2009, central banks spent most of their time trying to stimulate economies and to keep up. We have had a regime change following COVID, and central banks will need to keep one foot on the brakes to keep inflation at target levels.
“While the GFC and COVID might have been the proximate causes, demographic effects, particularly in the U.S., are also big drivers of this phenomenon. The risk of deflation produces different market dynamics than does the risk of inflation. Also, many institutions are going to find out how much their portfolio returns have been juiced by cheap leverage. The unwinding of that paradigm will create credit shocks that will drive volatility.”
“The post-World War II era has been dominated by a period of multinational negation and removal of trade barriers, leading to an unprecedented growth in international trade,” commented Allan Martin, a partner in NEPC.
AI, Ageism and More
The rise of generative artificial intelligence tools could have a profound impact on the markets, for better or worse. On one hand, it could lead to an increase in productivity; on the other, it may lead to layoffs when workers are replaced by AI.“Over the next 10 years, global economic growth is going to be impacted by the pace and depth of utilization and integration of AI by varying economic and industry sectors,” commented Eileen Neill, a managing director and senior consultant at Verus. “We already see this issue here in the U.S. as a factor in the negotiations between the writers’ and actors’ guilds and major streaming entertainment services and studios.”
With birth rates falling in much of the developed world, resulting in older and more lopsided populations, younger generations will have to contribute more to keep services such as Social Security funded and will be on the hook for older generations’ pensions.
“In the longer term, the world’s population is aging, and productivity continues to rise, so the norm of wealth distribution based on work performed will be challenged, with significant implications for the return to capital,” Martin commented.
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Tags: Allan Martin, Brady O’Connell, Eileen Neill, Knowledge Brokers, markets, Rowena Carreon, Ryan McGlothlin, Samantha Foster, Special Coverage: Consultants, Tim Filla