The Swiss bank UBS is trying to estimate developments for the coming year 2023. These horror scenarios are not that improbable.
A really difficult capital market year is coming to an end and already the view turns to 2023. The bank UBS expects a turnaround for investors in the coming year, as the money house announced on Thursday evening in its annual outlook.
Certainly, it sounds good that turning points for inflation, the interest rate hikes and economic growth should be reached. However, UBS also warns of numerous risks that could materialize in the coming year.
Signs of the times
Looking at key factors – such as central banks, economic growth and geopolitics- for the worst fears in each case a picture emerges for investors on what to watch out for and what could potentially be signals for their investment decisions.
First, UBS talks about inflation rates not falling back into central banks’ target bands, which is likely to delay interest rate cuts or even necessitate further rate hikes.
Central banks decide
However, it could also happen that central banks pause their rate hikes too early and thus boost economic growth too much. This could give inflation a further boost and make emergency operations on the interest rate screw necessary.
In terms of economic growth, however, the reverse could also happen. Therefore central banks could raise interest rates too sharply and/or consumption could collapse in industrialized countries because inflation is rising faster than wage growth would actually allow.
In Europe an extremely cold winter could also lead to interruptions to energy supplies, plunging the region into a deep economic crisis. All this is not at all improbable.
China on the move
China, too, might not allow the country to reopen until 2024 because of its zero-covid policy, the UBS economists warn in their negative scenario for the coming year.
A prolonged economic downturn could also loom if corporate profits fell sharply, bankruptcies rose sharply and commodity prices fell sharply.
Finally, investors must not lose sight of geopolitics. Here, UBS economists warn that the war in Ukraine could escalate further and/or relations between the U.S. and China could deteriorate.
Stock market slump
And an impairment of financing conditions could also trigger stress in the global financial system, they said.
All of this would lead to further declines in capital markets, and risky asset classes are likely to see double-digit losses. Credit default swap prices are likely to skyrocket, UBS said.
But safe havens, such as Switzerland, are likely to benefit in such stress situations.
For June 2023, the bank experts predict index levels in the horror scenario for the MSCI-AC-World of 590, for the S&P-500 of 3,300 and for the Euro-Stoxx-50 of 3,100 points.
In the more favorable UBS scenario, however, the three stock market barometers would end up at levels of 820, 4,400 and 4,400 points. Currently, these indices are at around 600, 3,900 and 3,900 points.
And this shows impressively that the difficulties lie in Europe, because the growth of the S&P 500 and Euro Stoxx are at the same peak. If all of the positive developments were to occur, Europe would have a stronger upward trend.
And this would also make it clear as to what efforts the Europeans would have to undertake to turn the tide for the better.
Warm winter wishes
First, the war in Ukraine would have to be contained or ended. Second, it would help if inflation rates fell faster than expected. So not all companies should always immediately jump to turn the price screw.
Third, the Europeans would have a clear advantage if tensions between Russia and the EU were to ease. UBS describes all of this in their ‘upside’ scenarios.
And, of course, Europeans could also hope for a mild winter, which would significantly ease the energy crisis and give a special boost to economic growth.