5 Key Themes of 2023

With unpredictable war and the domino effect on the global economy in the second half of 2022, 2023 is a critical year.

Let’s understand what are 5 key themes of 2023 everyone is watching out for:

  1. Inflation and interest rates

While inflation is going to be the key data point to track across all economies, it is going to impact the stock market performance as well as central banks’ decision on setting interest rates.

High interest rate regime seems to be the norm in 2023 impacting debt raising capacity for firms. The most vulnerable would be LBOs since their success depends on high leverage which is now expensive. However, that is not to say that companies would rely on equity for fund raising as stock markets are still volatile and not attractive for IPOs or follow on raises. A cautious approach towards fund raisers is going to be the way forward.

On the sell-side, higher interest rates mean higher discount rate and hence, valuations become lower. This may be attractive for trade as well as financial buyers. However, on the execution level, equity investment would be preferred over higher debt investments.

For investments, banks and other financial institutions have a certain win in this high interest rate regime. However, companies low on debt could be favourable while companies that depend on leverage for growth could be on a radar for exits.

  1. M&A cycle

2022 started with a boom in M&A but it quickly slowed down in the second half because of the macro dynamics. 2023 also follows this slowdown simply because of market volatility, high risk for lesser returns and comparatively conservative approaches by buyers than before. In general, the opinion is that M&As might regain popularity once equity markets have eased up and global economies seem to be able to control inflation in a predictable fashion.

  1. Cryptocurrency

It has been a disastrous year for crypto firms. Collapses of so many crypto houses, Bitcoin losing its value drastically, Ethereum introducing new methods of its operations, etc has all been quite chaotic. One trend that stands out is that the firms that failed were highly leveraged. Hence, high risk during mass withdrawals. Last year was the year of withdrawals because of the market sentiment dragging these crypto houses to a cash crunch. That does not mean it is the end of crypto’s era. These are just speed-breakers in its journey. The ones managed well by professionals will survive the long run. One lesson learnt is to have liquidity at any point of time, especially after a prolonged bull period. It is quite obvious from history that the global economy moves in cycles and a downturn was apparent this time since it was delayed long enough, partially also due to Covid relief measures. Hence, it would be interesting to see how this industry performance unfolds. Meanwhile, it is still a high risk space to invest and hence, a wise one would never go all in into this industry.

  1. Emerging markets

2022 has completely changed the power play on a global level. Although emerging markets were attractive before 2022, they are now the most favourable to invest in. Surprisingly, these markets seem less impacted / more resilient to this inflation and interest rate regime at the moment generating attractive investment opportunities. Hence, we might see many transactions and investments in those regions.

  1. Oil & Gas

With renewable energy threatening Oil & Gas, 2022 has re-glorified the industry, at least temporarily. With cash coming in, the Middle Eastern (ME) regions have this unique opportunity to diversify investments away from Oil & Gas to safeguard their long term future. Hence, we might witness many cross-border, non-Oil & Gas investments from ME players (Sovereign Wealth Funds, PE houses as well as trade buyers) not only in emerging markets but also in developed economies which are currently struggling.

Although investment in alternative energy and fuel is on the rise, 2023 might impose some temporary restrictions for investors since this space requires a long time to generate returns. Hence, we may see some short term investments increasing for Oil & Gas while the residual dry powder may be allocated for the alternative energy or fuel space. However, if the business in this alternative space is in the cash generative stage then it may be an attractive catch. So, the competition is going to be neck to neck.

Closing Remarks

These are the 5 themes which I believe are popular to watch for 2023. If the world manages to bottom out and reverse to recovery by end of 2023, then 2024 and 2025 might be some glorious years to witness. Monetary policies implemented this year, status of the Ukraine war which we all hope to ease this year, and strong financial policy within companies and investment houses is going to be key to determine whether we bottom out this year or drag it further. Q1 2023 will set the tone for rest of the year helping investors (retail as well as institutional) to determine the best investment strategy for this year. For now, the sentiment seems cautionary.

Disclaimer: This article is in no way a recommendation to buy or sell any instrument whatsoever for anyone. This is just an opinion and an individual, independent analysis aimed at making the audience think about crucial questions today. Always make your investing decisions through an expert and through your personal research.
MSc Finance graduate from the London School of Economics and Political Science (LSE)
Avatar for Ria Vaghela

Ria V Vaghela is an M&A Executive at RSM UK and an MSc Finance graduate from the London School of Economics and Political Science (LSE). She has worked at Jefferies, Dial Partners and 7i Capital prior to RSM UK gaining an experience of about 1.5 years. She has also worked as an Editor and Content Writer for The Representative Media. Apart from finance, she is interested in reading books on psychology and economics and also likes to paint and play lawn tennis

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