The top five risks in 2023

01 November 2022 , 13:44

We see five main risks that might challenge our outlook for 2023: monetary and fiscal policies, wars, China’s economic momentum, COVID-19, and social unrest. These may add upside or downside risk to our base case. The five risks are also not mutually exclusive, and their impact could be compounded if many of them materialise in a short period of time.

Monetary policy

The significant U-turns performed by most major central banks this year was the main driving factor behind price action in the markets. At this point, consensus suggests that their actions will help to tame inflation over the next twelve months without taking economies into a severe recession. Unfortunately, such a scenario isn’t a given. Just like the rest of us, central banks rely on the data available to pilot their decisions.

Regrettably, most central bankers appear to be focused on lagging measures of inflation, such as the consumer price index (see chart). By looking backwards, instead of forwards (by relying on leading indicators), central banks run the risk of getting ahead of the curve and hiking interest rates more than necessary. This may help to bring inflation back to more normalised levels faster, but it also increases the risk of a more pronounced drop in economic activity.

Equally, another U-turn is possible (although less likely, in our opinion) and central banks could bottle out of hiking rates too soon. In this scenario, inflation would likely remain elevated for much longer than anticipated and inflationary expectations could finally de-anchor, bringing with it the spectre of stagflation. 

In other words, central banks around the world are walking a very fine line when trying to balance inflation and growth. Our view is that they will prefer to hike too much rather than too little. However, because we will know if they were successful only after the fact, we continue to expect continued central bank-driven volatility.

Last, but not least, investors should also pay attention to the policy mix. As central banks tighten monetary policies, governments may decide to pick up the baton and increase spending to support growth. As we’ve seen on the back of the UK’s “mini” budget in September, following which rates spiked and the fiscal policies were reversed, the risk here is that the “bond vigilantes” keep governments in check, introducing further stress in fixed income markets. If, on the other hand, governments fail to provide adequate support, the pain inflicted on their economies could be greater than otherwise expected. Again, fiscal policy could be a significant source of volatility.


Geopolitical tensions have been a key feature of 2022, and they are unlikely to disappear in 2023. The war in Ukraine is the most obvious risk at this point. A resolution appears unlikely in the short term, but, if both sides find a way to claim victory, a détente is possible. Equally, further escalation shouldn’t be ruled out. Russia would likely achieve very little, apart from losing support from its few allies, if it decided to hit the nuclear button. Instead, putting further pressure on Ukraine’s infrastructure as well as engaging in a cyberwarfare seems to be Moscow’s best option to try and win this conflict.

One thing appears almost certain: the West’s sanctions against Russia are here to stay. Even if a truce were agreed tomorrow, it’s hard to imagine that Europe will start buying gas from Russia immediately or that occidental businesses will rush back into the country. This means that the energy crisis that has hit the world, especially Europe, won’t be solved in 2023. Energy prices may behave better, but short-term spikes are likely.

In turn, this would affect the global inflation outlook and, back to the risks around monetary and fiscal policies, could force government to find ways to shelter their economies as much as possible.

Ukraine, however, is not the only possible flashpoint. Taiwan could also be another one in 2023, with China exercising increased pressure on the territory in recent months. Should Beijing decide to annex the island, the repercussions would make the conflict in Ukraine seem like a storm in a tea cup and would send shockwaves around the world (see chart).

Even if a conflict is avoided, with tensions running this high, investors are likely to demand a higher risk premium.

China’s economic momentum

China’s economy remains crippled by the central government’s zero-COVID policies and the massive deleveraging occurring in the real estate sector (see chart). On the former, even this approach appears increasingly untenable, domestic authorities are making very limited progress in easing restrictions. The upside scenario would be a mass vaccination programme. In recent weeks, several Chinese pharmaceutical companies have started to build factories aimed at manufacturing mRNA vaccines, according to media reports. If they can curtail lockdowns, China may be on its way to re-opening.

If not, then the central government will have to step up its stimulus to ensure that its target of doubling growth between 2020 and 2035 remains achievable. This is difficult at a time when the local real estate sector is going through an existential crisis. That being said, unlike many countries in the developed world, China’s public finances are in reasonable shape, leaving room for increased spending. The government will still need to be mindful of the risks around capital outflows if the yuan depreciates further. Another difficult balancing act.

The world will need China’s economy to reaccelerate in 2023. While local authorities seem reluctant to do what’s needed, they may not have a choice in a few months’ time. With a global economy that is most likely to slow significantly, China could be a bright spot next year.


Speaking of COVID-19 appears to be outdated. We’ve been able to enjoy meeting with friends and family, travelling the world, and breathing without a mask on in recent months. But the reality is that this virus hasn’t disappeared. According to the data available, there were more confirmed (and reported) cases of the virus in 2022 than in 2020 and 2021 combined. Encouragingly, the number of reported deaths linked to COVID-19 has increased by a fraction of that, as the strain of the virus currently circulating is much more benign (see chart).

Unfortunately, there is a possibility that new, more lethal variants will emerge. Recently, variant “BQ1” and “BQ1.1” have been spreading fast in the US and seem far more resilient to some current treatments. Similarly, a new lab-made version of the virus was reportedly able to kill 80% of the mice that were infected by it. Going back to widespread lockdowns akin to those in 2020 would be an extreme scenario, but the risk of increased disruption to economic activity is real.

Thankfully, we know a lot more about this virus and populations are much more aware of the behaviours to adopt to limit transmission. Yet, we believe investors shouldn’t dismiss further coronavirus-linked disruption hitting economies, especially in the winter months.  

Social unrest

Inflation is a problem in that it eats into people’s purchasing power, especially when it runs significantly ahead of real wage growth. With consumer price indices rising at a double-digit pace in parts of the developing world (and being close to that in the US), discontent is growing and voters are voicing their concerns.

In emerging countries, where higher prices can prevent a large portion of the population from buying the most basic necessities, high inflation can quickly lead to mass protests and instability (see chart). This issue is further compounded by climate change-related issues, such as drought or flooding, that further limit the supply of food, and by challenged public finances that prohibit significant government support. In this respect, the recent events in Sri Lanka are a striking illustration of what could happen in many countries globally.

In developed economies, the risk is slightly different. While people may take to the streets, riots are rather rare. Instead, increased populist rhetoric and opposition could force governments to spend their way out of a crisis. However, in the context of higher interest rates and elevated debt ratios, markets aren’t responding well to unfunded, broad-based support plans. Social unrest may therefore not be easily contained this time around.

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