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Worst case scenarios and wild cards: Black swan hunting in 2023

After a rollercoaster start to the 2020s, black, white and grey swans now flit through the mind of every money manager. BCA Research has identified five such swans that could shape markets in 2023.

Efforts to spot black swans before they alight in the proverbial pond are usually unsuccessful – not
least because, by definition, they’re impossible to spot. And even if you are successful the Observer Effect transmutes them into the slightly less rare (and dangerous) grey variety. But BCA Research, gazing into its crystal ball, has seen five high-impact, low probability events of the kind mentioned in the same breath as black swans – and delivered a reminder that forecasts are usually written in sand.

One possible ‘black’ swan is Iranian regime change. High energy prices (and countries willing to circumvent sanctions to avoid them) have so far tided them over, but BCA chief geopolitical strategist Matt Gertken (picture at top) doesn’t put much faith in the current regime lasting forever. Its ruling classes are divided, with a dispute looming over who will replace Ayatollah Khamenei as Supreme Leader upon his death, while political leaders are speaking out about the brutality with which police have put down recent protests.

“You can see global growth is slowing, and there’s already a sanctions regime that has greatly reduced their oil exports in recent years,” Gertken says. “They’ve been hit by the Covid shock, and unemployment is starting to tick up again, and those statistics are probably underrating the problem… inflation is soaring; inflation is above 35 per cent in Iran, and you see the currency is collapsing. They’re basically in a wage/inflation spiral, and this could easily compound with the (political) problems they’re having.”

A collapse would be something like the Syrian Civil War, with the substantial security forces controlled by the state likely to be put to work. Iraq or Saudi Arabia might also be sucked into a potentially fractious collapse and would see oil production and shipping disrupted.

As far as black swans go, normalisation of ties between Russia and the wider European community seems even more unlikely. It isn’t impossible, though at present there’s no good reason for them to do it; it would only show weakness and a lack of commitment to its war effort in Ukraine.  

“One reason would be that their cut-off hasn’t worked; prices are collapsing,” Gertken says. “Europe is rapidly diversifying away from Russian energy. They’ve played this card and it hasn’t worked, and there’s some chance that Russia could pursue drastically different approach this year if they admit defeat in Ukraine and work on stabilising their economy. That’s very hard to see, and would require a change in leadership.”

Something on every investors’ wish list is a thaw in the relationship between China and the United States, though it seems unlikely when the latter is still tightening its export controls on the former. Still, the Biden Administration could “decide it wants something to happen”. Biden has his hands full of foreign policy crises while his popularity is on a knife’s edge at home.

“The Biden Administration in general is adopting the Trump Administration’s tough policies on China,” Gertken says. “You can see US exports of semiconductors are slowing down even faster when it comes to China than when it comes to the rest of the world, where they used to grow a little faster. That’s just a small way of pointing to the impact of US restrictions…. Biden is expected to get tougher.”

“At the same time, China is opening up. The services sector is likely to start accelerating, and equities are expected to reflect this; hotel, leisure and restaurant equities are outperforming now. And this has effected the reopening from Covid; there’s going to be stimulus and there’s going to be diplomatic outreach to other countries. We already saw this with Germany and Japan, soon France. China is trying to talk to countries and lower the level of tension and reboot the economy that way.”

The other black swans are a military coup in Turkey, prompted by its failing economy (such a coup would be a buying opportunity, Gertken says, because it would mean that monetary and fiscal orthodoxy would probably be restored); and a North Korean conflict (one “that matters” rather than a red herring provocation to one), with the hermit nation emboldened by its swollen nuclear arsenal.

Of course, BCA’s mainline expectations for 2023 contain no black swans (because it’s impossible for them to). China’s reopening will stabilise growth in the short-to-medium term before structural economic and (geo)political problems stymie it in the long-term. A political power struggle in the United States between Democrats and Republicans means fiscal policy gridlock, and President Biden will have to focus more on foreign policy because he can’t pass policy at home, while monetary policy (through the Fed) will become more important. And the increasingly dastardly petrostates – Russia, Iran – will become increasingly unstable.

“This year is still a year in which investors should be, broadly speaking, defensive and cautious,” Gertken says. “We should view the current rally in risk assets and cyclical assets as a bear market rally. I think we should be prepared for the fact that, if economies improve markedly, it means central banks will be raising rates further and that will ultimately push rates further into restrictive territory and likely weigh on growth.”

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