Peace in Ukraine would give financial markets the boost they need in 2023
- In addition to the massive human cost, the war has hurt global stability and growth prospects, wreaking chaos on energy markets
- The introduction of a peace premium into expectations could easily lift global equity prices by the 20 per cent lost last year
The hope for 2023 is that both sides can reach an early ceasefire. It is the peace premium which has been long missing that could make a significant difference on many fronts in 2023.
Expectations for gradual recovery were quickly replaced by growing alarm about the future risk of global recession. Fears about Ukraine hostilities dragging on for a lot longer than anticipated and the central banks taking a much tougher line on inflation weighed heavily on sentiment.
A year on, by the end of 2022, the OECD had changed its mind with a much more downbeat assessment for global economic prospects, slashing 1.4 per cent off its estimate for world growth in 2022 down to 3.1 per cent, while knocking 1 per cent off its forecast for 2023 down to 2.2 per cent.
With confidence collapsing after the Russian invasion of Ukraine, global stock markets sank by around 20 per cent overall in 2022, with global bond yields surging at the same time. Ten-year US Treasury yields jumped by 2.2 per cent over the course of 2022 as the bear market raged for bonds.
Global energy markets are already showing tentative signs of optimism, with natural gas prices recently dropping well below levels prevailing before the Ukraine crisis first broke.
Oil market tensions are easing too. The warmer weather and easier demand and supply conditions might have helped, but the price falls are also symptomatic of an expected easing of geopolitical tensions over the future.
Global stock markets may be focused on recession risks right now but the introduction of a peace premium into expectations could easily lift global equity prices by the 20 per cent lost last year, if not more. Much depends on how quickly global energy markets return to normal, but lower fuel costs could have a dramatic impact on inflation and interest rate expectations over the next few years.
Headline inflation is expected to ease during the course of 2023 due to year-on-year base effects, but dramatically lower energy costs could hasten the return to official targeted levels of 2 per cent inflation much quicker than expected over the next two years.
Falling inflation expectations, lower interest rates and the prospect of faster growth should be manna from heaven for equities and risk assets in 2023. Investors are craving a return to normality.
John Lennon was spot on when he challenged the world to give peace a chance. And never more so than now.
David Brown is the chief executive of New View Economics