2022 was a difficult year for the financial markets, which reacted to the international scenario with high volatility. 2023 will still be affected by international dynamics, but there could be an improvement. 

2022 was a very complex year, probably one of the most difficult faced by the financial markets, which experienced fluctuating trends and high volatility.

The war in Ukraine took place in highly challenging international circumstances related to the COVID pandemic, with consequences for rising energy prices that hit businesses and households and led to higher inflation in Europe.

The climate emergency also overshadowed this situation, in response to which the complex ecological transition was initiated, requiring significant public-private investment. 

With 2022 set aside (or almost), all eyes are now on 2023: what kind of year will it be? What can we expect on the financial market front? How should investments be managed?

Towards 2023: the unknown inflation factor

One of the things that characterized 2022 and marked a break from the past was the rise in inflation, which reached record highs in Europe. From a financial point of view, it was probably the most important, long-awaited event, which also led investors to review the construction of their portfolios. 

In the Old Continent, the increase is mainly driven by supply-side dynamics, particularly energy price trends, while in the US inflation is more related to increased demand for goods and services that are available in smaller quantities due to supply chain problems, which drive up prices.

On the two continents, the central banks (FED in the US, and ECB in Europe) reacted in the same way, albeit at different times. That is, they raised interest rates to “dry up” a large amount of liquidity injected in the previous year to cope with the major international crisis of 2008 and 2012.

In fact, the raising of rates by central banks increases the costs associated with borrowing and makes saving more attractive: if the demand for products and services falls, then prices should rise less rapidly, remain unchanged or even fall, thereby keeping inflation under control.

What will happen in 2023? It is always very difficult to make predictions, as there is always the risk of an unforeseen event (the “black swan”) looming over all analyses, as was the case with COVID, which can turn everything upside down, for better or worse.

However, from the information on the central banks' monetary policies, one can at least draw a rough picture. As early as 14 December, for example, a slowdown in interest rate hikes by the FED is expected given the latest US inflation data, which fell to 7.7% after a peak of 9.1% in June, a sign that the inflation rate could slow down with a consequent easing of monetary tightening by the FED.

US dynamics are generally precursors of European ones, so we may see a similar trend for interest rates in the coming months from the ECB, which already pointed out in November that “inflation will start to slow down in the first half of next year and that we may be very close to the peak” ^[1] .

One point remains, however, which could cause all forecasts to be revised. According to the International Monetary Fund, a share of inflation in Europe cannot be explained based on traditional criteria. ^2].

Therefore, inflation in 2023 remains an unknown factor, at least for Europe, and enables the future effects of monetary policies to be defined with certainty.

Geopolitical risks: what will happen in 2023?

International tensions are the other big unknown factor in the coming year. On top of everything, the war in Ukraine is certainly dominating, because a new definition of global geopolitical relationsis also expected from its developments.

In a globalized and interconnected world, evolving tensions between China and Taiwan could also have an impact on the European economy, as well as possible catastrophes related to climate change, which could hit at any latitude and generate chain reactions that become global.

Internal country factors will also play a role. The rising cost of living and the deterioration of the labor market will serve to aggravate social inequalities, which will require particularly careful management by governmentsto avoid destabilizing countries.

The combination of these variables shows that, despite a glimmer of hope, 2023 will still be a complex year, with economic, geopolitical, and financial risks. However, as is now well known, crises also bring with them opportunities. A symbolic example is the ecological transition, stimulated precisely by the war in Ukraine, which has consolidated the need to move away from fossil fuels to produce energy.

Therefore, managing uncertainty, which has become the dominant feature of the new millennium, may be the key to facing the new year on the investment front.

^[1] https://www.ansa.it/sito/notizie/economia/2022/11/24/bce-ipotesi-stop-a-rialzi-dei-tassi-se-ci-sara-una-recessione-profonda_838592d8-a928-434f-9e5a-97060da3ff6c.html

^[2] https://www.imf.org/en/Blogs/Articles/2022/10/23/europe-must-address-a-toxic-mix-of-high-inflation-and-flagging-growth