Our top five capital markets risks for 2023

This has been a year where investors have been very concerned with the big macroeconomic and geopolitical risks, and markets have responded accordingly. It has led to some crazily cheap valuations on some very good companies and unprecedented volatility in some areas of the commodities and FX markets.

In this article we follow up on our November 2021 piece, looking at our top five risks that investors need to be aware of as they make their plans for 2023. It has been a rough year in the markets, but are we destined for another?

1. Commercial property market

Higher interest rates and the change in working practices are going to ask some big questions of the commercial property market in 2023. Many companies in the space have been hoping for a return to normal, but the new normal has some very unpleasing realities for them, with huge swaths of office space still empty in prime financial districts. Canary Wharf Group for example is trying to figure out new ways to occupy its existing office space profitably at a time when the office vacancy rate in Docklands is the highest in London. Many big firms - e.g. Barclays and law firms Clifford Chance - are understood to be planning to either downsize their presence or move out of Docklands entirely.

The London commercial office space market sits in the eye of the storm here, but other cities around the world will likely also experience further woes as a downturn in office yields takes effect. In November fund manager Blackstone limited withdrawals from a $125bn real estate investment fund (Blackstone Real Estate Income Trust). The fact remains that many property fund managers cannot sustain the levels of liquidity they have promised investors to date. I anticipate more issues of this kind next year as investors look to exit the sector in droves

2. Global recession risk

While inflation seems to be running out of speed, investors are going to have to brace themselves for a possible global recession in 2023. This has been on the cards for a while so should not come as a huge surprise. Hikes by the Federal Reserve seem to be taking effect, but we are also now seeing the US jobs market beginning to cool and consumer confidence to ebb. Global growth is currently forecast to drop to 2.7% in 2023, which is the weakest growth profile since 2001, with the exception of the 2008 financial crisis and the immediate impact of the pandemic in 2020.

"The combination of ongoing uncertainty around interest rate policy, high inflation, and continued weakness in household and business confidence is likely to push the world into a synchronised recession," says Neil Wilson, Chief Markets Analyst at Finalto. "But as Christine Lagarde pointed out, recession won’t be enough to tame inflation. This points to continued stagflation conditions with higher-for-longer inflation coupled with lower growth rates."

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3. China

China has been the powerhouse for global economic growth for a very long time, but the country's zero Covid doctrine has also taught us just how much we depend on it for keeping things ticking over. Chinese economic numbers are now more closely watched than ever. All eyes are on whether China can successfully shift from a zero Covid strategy, gradually reopening without the risk of hundreds of thousands of deaths from the Covid 19 virus. Current thought in Beijing is that the virus is now milder than it was, but bear in mind that millions of Chinese people have not received an MRNA vaccine, nor are likely to in the foreseeable future.