LONDON, Jan 3 (Reuters Breakingviews) – There was a time when forecasting was a relatively simple pursuit. The most reliable approach was to assume that the coming year would turn out much like the previous one. Many corporate chieftains and money managers owed their glittering reputations to this simple rule of thumb. No longer. In the past three years, the world has been rocked by a string of unexpected and epoch-defining events. Little wonder that executives, policymakers and financiers are anxiously scanning the horizon to work out what is coming next.
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At the start of 2020, many world leaders identified climate change and the shift from fossil fuels to renewable energy as the planet’s most pressing challenge. Within a few weeks, they were confronting a deadly pandemic. Twelve months ago, the debate shifted to how quickly the world would recover from Covid-19. Then Russian President Vladimir Putin invaded Ukraine, upending geopolitical relations and disrupting global markets for energy and food.
Anyone trying to think about what 2023 will bring is confronted by a staggering array of possibilities. This is why many chief executives and investors have dispensed with forecasts, preferring to plan for a range of scenarios. Some of these are specific: What happens if Chinese President Xi Jinping orders an invasion of Taiwan? What if Putin unleashes tactical nuclear weapons in Ukraine? What if a cyberattack cripples critical infrastructure? In many cases, just envisaging possibilities requires a leap of imagination.
It is in this spirit that Breakingviews once again embarks on its annual effort to guide readers through the trends and events that might shape economies, corporate fortunes and asset prices in the year ahead. The aim is not to hit the bullseye of forecasting accuracy, but to offer a way to think about some of the decisions that may crop up in the next twelve months.
The first challenge is to narrow down the range of topics. Geopolitical questions loom large: like most occupants of corporate boardrooms, our columnists are pondering the effects of tensions between the United States and China, not just on supply chains for Apple’s (AAPL.O) iPhones and semiconductors, but also on raw materials like those vital to making electric-car batteries. The intensifying superpower rivalry may produce new winners, like a Vietnamese challenger to Tesla (TSLA.O). It could also revive U.S. cities that have languished for years.
In finance, the big unknown is working out who else will be submerged by the rising tide of global interest rates. More expensive money has already stalled corporate dealmaking, sideswiped stock market valuations and plunged cryptocurrencies into a deep freeze. Even if central banks pivot away from aggressive rate hikes in 2023, entire industries and asset classes will grapple with financial conditions they have not experienced for at least 15 years. Meanwhile, expect the Bank of Japan (8301.T) to revisit its ultra-loose monetary policy, while Western central banks quietly shift their inflation targets.
Another reasonable bet is that the planet will continue to get warmer, producing more extreme events like the floods that devastated Pakistan in 2022. Though the invasion of Ukraine pumped up the price of fossil fuels, it has spurred Western countries to speed the shift to renewable energy. That is reordering old energy alliances. Watch whether the United Arab Emirates, which hosts the COP28 climate conference in November 2023, distances itself from the OPEC oil cartel.
Encumbered by lower stock prices and pricier financing, merger activity will remain subdued in 2023. Still, M&A bankers should find some bustling pockets: Big Pharma may aim its financial firepower at cheaper targets. Pet businesses could become tasty snacks for consumer giants. Big companies like Mark Zuckerberg’s Meta Platforms (META.O) may break themselves up. And as always, adversity will deliver some surprising good news: how about a divided U.S. Congress mounting a bipartisan effort to raise the country’s debt ceiling?
Identifying possible scenarios is just the start, though. The harder bit is planning what to do if they materialise, and working out which extreme outcomes to prepare for. All these decisions involve real expenses, and the opportunity cost of investments shelved or innovations delayed. Such is the complicated and unpredictable world that we now inhabit. The only place to start is by thinking about what comes next.
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(This is a Breakingviews prediction for 2023. To see more of our predictions, click here.)
Editing by Robyn Mak and Katrina Hamlin
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