Four potential 'black swans' for 2023

Russia’s invasion of Ukraine caught most investors off guard and has had a major impact on global financial markets. What new ‘black swans’ could the world face in 2023?

The investment team at Marlborough have undertaken scenario analysis looking at extreme events that, while unlikely, are still plausible. Here are four scenarios they have considered that could have a major impact on markets in the year ahead.

Scenario 1

Putin overthrown after Ukraine defeats Russian forces

Vladimir Putin’s invasion of Ukraine has been far from successful. What the Russian leader expected to be a swift land-grab has turned into a grinding war, with heavy losses on both sides.

The West is supplying Ukraine with increasingly sophisticated weapons that could tip the balance and enable Kyiv’s forces to retake Crimea and push Russian troops back to the borders that existed before Putin’s first incursion in 2014.

Forced to negotiate peace terms, Putin’s strong man image crumbles as he is humiliated in front of the Russian people. Infuriated by the pointless loss of life, Russians take to the street in revolt. The military, no longer in thrall to Putin, pointedly fails to intervene.

To restore order and protect their own power, a group of Putin’s erstwhile Kremlin allies take control, as the former leader enters a sanatorium on ‘health grounds’. The end of the conflict enables the reopening of food, gas and oil supply chains, and inflation falls back to pre-pandemic levels. Central banks begin to reduce interest rates and an equity and bond bull market is unleashed.

Nathan Sweeney
Deputy CIO, Marlborough Multi-Asset

Scenario 2

US and China de-escalate tensions and improve trade relations

The US and China are in a long-term competition to prove which model of government can best solve global problems and improve the lives of citizens.

The two nations are currently locked in a trade war, the US is working hard to slow China’s development of cutting-edge technology and tensions are escalating over Taiwan.

However, reports are emerging from Beijing of plans by China’s leader Xi Jinping to fundamentally reset relations with the West, with new policies designed to improve diplomatic relations, reduce international isolation and boost his nation’s strained economy.

This would provide an opportunity to improve economic and governmental co-operation between the US and China.

The advantages of a thaw in relations are clear. Washington and Beijing have a mutual self-interest in working together in areas such as detecting virus outbreaks, mitigating climate change, limiting Iran’s nuclear programme and improving global energy and food security.

Xi travels to the US in November for a meeting of the leaders of the Asia-Pacific Economic Co-operation forum and this would present the perfect opportunity for more co-operative overtures.

An improvement in trade relations would boost US and Chinese equity markets, and could support risk assets more generally, with reduced trading friction benefiting companies around the globe.

Nick Peters
Investment Advisor, Marlborough

Scenario 3

Striking UK workers win inflation-beating pay rises

The UK government has been standing firm against striking public sector workers fighting for above inflation pay increases.

However, this position may not be sustainable indefinitely if trade unions stick to their guns and continue to enjoy widespread public support. In a scenario where inflationary pressures are beginning to ease and unions are threatening a de facto general strike and another ‘winter of discontent’ at the end of this year, the government could bow to mounting pressure.

Above-inflation pay rises could be awarded to public sector workers in exchange for significant reforms to working practices. This would not be unprecedented for a Conservative government. In 1979, Margaret Thatcher gave public sector workers a 25% pay increase to avert another ‘winter of discontent’.

A pay deal like this, combined with tax cuts at the lower end of the earnings spectrum, ahead of an expected 2024 General Election, would put the UK’s public finances under the microscope once more and risk a repeat of the late-2022 runs on sterling and UK government bonds. However, with other nations heading into lengthy recessions, a better-presented ‘dash for growth’ economic policy in the UK could be received more positively by global investors.

Danny Fox
Manager, Marlborough Global Bond

Scenario 4

Global ban on cryptocurrencies

Sam Bankman-Fried is due to stand trial in New York in October to answer fraud charges relating to the collapse of one of the world’s largest cryptocurrency exchanges, FTX Trading, which he founded in 2019. The sums alleged to be involved run into billions of dollars.

Bankman-Fried is accused of diverting FTX client funds to cryptocurrency trading firm Alameda Research to bankroll venture investments, luxury real estate purchases and political donations. He has pleaded not guilty.

US Securities and Exchange Commission Chairman Gary Gensler has repeatedly called for greater regulation of cryptocurrencies, calling it an asset class ‘rife with frauds, scams, and abuse’.

If further cryptocurrency scandals emerge, demonstrating corruption on a global scale, then regulators worldwide could be forced to intervene and ban the use of cryptocurrencies, only permitting central banks to use state-backed digital currencies.

In this scenario, equity markets would be likely to benefit, as investors around the world return to traditional asset classes.

Nathan Sweeney
Deputy CIO, Marlborough Multi-Asset

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