Vijay Kumar Gaba

य: सर्वत्रानभिस्नेहस्तत्तत्प्राप्य शुभाशुभम्, नाभिनन्दति न द्वेष्टि तस्य प्रज्ञा प्रतिष्ठिता

One who remains unattached under all conditions, and is neither delighted by good fortune nor dejected by tribulation, he is a sage with perfect knowledge.

—Srimad Bhagawad Gita, Verse 57, Chapter 2

In the calendar year 2022, a multitude of battles were fought. These battles materially impacted the global markets and investors. Some of the important battles were —

(i)    Russia-Ukraine conflict that polarized the global strategic powers, threatening to unwind the post USSR globalization of trade and commerce;

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

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

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

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

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

(vii)  Investors’ battle with markets to protect their wealth.

It is likely that most of these battles will continue in the 2023^rd year of Christ as well. The outcome of these battles will eventually determine the direction of the global economy and markets in the next many years.

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 of course be some periods of ceasefire creating an impression that a conflict has been resolved, or is close to resolution. These impressions may drive the markets higher and make investors buoyant.

Nonetheless, a sustainable positive outcome from some of these conflicts will definitely be positive for the global economy and markets. It is therefore extremely important for the investors to maintain a equanimous stance. They should neither get swayed by the buoyancy created by temporary ceasefires in these battles, nor get panicked by the intermittent aggravation of these conflicts; while staying fully alert for a significant directional move in the market. They should at least avoid committing to a “bullish” or “bearish” stance early in the year.

I would like to quote two views, of reputable experts, to emphasize the despondency that is defining the global narrative presently:

Noriel Roubini

“Of course, debt can boost economic activity if borrowers invest in new capital (machinery, homes, public infrastructure) that yields returns higher than the cost of borrowing. But much borrowing goes simply to finance consumption spending above one’s income on a persistent basis – and that is a recipe for bankruptcy. Moreover, investments in “capital” can also be risky, whether the borrower is a household buying a home at an artificially inflated price, a corporation seeking to expand too quickly regardless of returns, or a government that is spending the money on “white elephants” (extravagant but useless infrastructure projects)….

…the global economy is being battered by persistent short- and medium-term negative supply shocks that are reducing growth and increasing prices and production costs. These include the pandemic’s disruptions to the supply of labor and goods; the impact of Russia’s war in Ukraine on commodity prices; China’s increasingly disastrous zero-COVID policy; and a dozen other medium-term shocks – from climate change to geopolitical developments – that will create additional stagflationary pressures.

Unlike in the 2008 financial crisis and the early months of COVID-19, simply bailing out private and public agents with loose macro policies would pour more gasoline on the inflationary fire. That means there will be a hard landing – a deep, protracted recession – on top of a severe financial crisis. As asset bubbles burst, debt-servicing ratios spike, and inflation-adjusted incomes fall across households, corporations, and governments, the economic crisis and the financial crash will feed on each other.”

(Read full article “The Unavoidable Crash” here)

Russell Napier

“This (inflation) is structural in nature, not cyclical. We are experiencing a fundamental shift in the inner workings of most Western economies. In the past four decades, we have become used to the idea that our economies are guided by free markets. But we are in the process of moving to a system where a large part of the allocation of resources is not left to markets anymore. Mind you, I’m not talking about a command economy or about Marxism, but about an economy where the government plays a significant role in the allocation of capital. The French would call this system «dirigiste». This is nothing new, as it was the system that prevailed from 1939 to 1979. We have just forgotten how it works, because most economists are trained in free market economics, not in history….

…the power to control the creation of money has moved from central banks to governments. By issuing state guarantees on bank credit during the Covid crisis, governments have effectively taken over the levers to control the creation of money…

…Out of all the new loans in Germany, 40% are guaranteed by the government. In France, it’s 70% of all new loans, and in Italy it’s over 100%, because they migrate old maturing credit to new, government-guaranteed schemes…. For the government, credit guarantees are like the magic money tree: the closest thing to free money. They don’t have to issue more government debt, they don’t need to raise taxes, they just issue credit guarantees to the commercial banks…

…Engineering a higher nominal GDP growth through a higher structural level of inflation is a proven way to get rid of high levels of debt. That’s exactly how many countries, including the US and the UK, got rid of their debt after World War II….

…We today have a disconnect between the hawkish rhetorics of central banks and the actions of governments. Monetary policy is trying to hit the brakes hard, while fiscal policy tries to mitigate the effects of rising prices through vast payouts.

(Read full interview here)

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 1H2023, but persistent inflation may delay any easing to 2024. Higher rates may begin to reflect on the 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 ceasefire in Ukraine with 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% in 2023. A sharper global slowdown may actually bring real GDP growth closer to 5% in 2023. Though domestic food prices are expected to ease; a weaker USDINR 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 FRBM targets for FY24. Worsening of 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 larger range of 16500-20100. The risk reward at the present juncture is therefore fairly balanced. The Treasury bond yields may stay close to present level but the AAA-GSec spreads may widen as corporate borrowing costs rise. USDINR may weaken to the 83-85 range.