If 2022 saw a return of forces including multi-decade-high inflation, rising interest rates, and war, what is likely to unfold in 2023? Will those forces persist and become regular features of the landscape, or were they merely aberrations? For answers, GLG’s Conor Aikin recently hosted a teleconference with author and investment industry veteran Michael O’Sullivan. Their conversation, edited for space and clarity, follows.

What key macro trends will shape 2023?

Underlying everything that is happening as we begin this year, the decades-long period of globalization that existed before 2022 is ending. During globalization, inflation was minimal, central banks kept rates low, and there was relative peace among the world’s large nations. Now, that era is effectively over. While trade levels relative to GDP remain quite high, much is changing under the surface, creating intense complexity and market volatility. I’d prefer to hold corporate and government bonds instead of equities, which I think will experience one, two, or maybe more deep corrections. Private equity and real estate also will see declines. The declines are positive. They will reset valuations to long-term-average levels, which will be good for investors.

Overall, I see five broad trends developing in 2023:

1. The change away from globalization as we knew it toward a world governed by strategic competition, where the aim is being sort of self-sufficient in key technologies.
2. The return of the state, in which countries try to be more responsive to people’s needs.
3. We’re likely to see a decline in the power of autocrats vis-à-vis democracies.
4. A trend that I call “macro unraveling,” which is the unwinding of some of the macro certainties we’ve held for the last 30 years, such as “low rates for longer.”
5. A massive investment and focus on technology generally and specifically in energy and in select areas including supply chain technology and fintech.

Related to your second theme, what do you make of the rivalry between the U.S. and China?

The beginning of the end of globalization is intimately linked to democracy. When globalization took hold, it did so because of the fall of communism in Eastern Europe. In the decade since the global financial crisis, democracy has been in a recession or a depression in the sense that the number of democracies worldwide has shrunk, with only 8% of the world’s population now living in what we would call full democracies. That’s a worryingly low number. Also troubling is that the quality of partial democracies has declined.

Strongmen have risen around the world, and their tenure has been marked by decline, chaos, and severe political tension. But many autocrats now are feeling great stress. Trump is marginalized, Boris Johnson is gone, and Bolsonaro is out of power. In two major autocracies, Russia and China, the key autocrats are under great stress. The Russian economy is in a deep downturn. Xi Jinping, now leader for life, has been hurt by his handling of COVID-19 and the weakened state of the Chinese economy.

In terms of the balance between democracy and autocracy, last year was good for democracies, and I expect that trend to continue. Democratic countries will have to invest more in democracy and be ever more vigilant about the effects of social media on politics and elections. We’ll also have to innovate with things like citizen juries and citizen assemblies, which are ways to meet more people’s needs and diffuse political extremism.

Explain “macro unraveling.”

Several trends over the last 20 or 30 years have become taken for granted. But if they break down, they risk causing enormous disruption economically and financially. Key among these is borrowing costs. A whole generation of people has come to assume mortgages are cheap, while a generation of entrepreneurs has come to assume access to cheap capital. They assume that as soon as central banks get inflation out of the way, rates will go back down to where they were. But I don’t think that will happen.

In the coming months, we’ll see headline inflation come down, but core inflation will remain sticky and may require some violent central bank policy to bring it down. The macro trend here that is unraveling is low interest rates. We’re likely to see rates remaining at a higher level for some time, and that will reset a whole range of business models with huge winner-and-loser effects between companies, households, and countries that are cash rich and have low debt versus those that are highly indebted.

You mentioned technological developments. What about those?

The flip side of the end of globalization is the building up of many new industries. Europe has become a leader in green tech and energy tech across the board, which is leading to the creation of new infrastructures and ecosystems. In other technologies, like fintech, we’re seeing consolidation.

In healthcare, a whole range of companies may not be revolutionizing the sector, but they are making it much more efficient. I’m personally focused on what I call “post-globalization technologies” like those dealing with supply chains, which can track goods from their origin to the final buyer. As a result, companies can construct supply chains that avoid labor problems or countries facing sanctions. It’s very exciting.

What risks do you think people are overestimating, and which are they underestimating?

There are a few things that shouldn’t be major concerns. One is an invasion of Taiwan by China, whose army and navy are very big but effectively untested. An invasion would be an enormous risk for China and one that is uncharacteristic of Chinese policymakers, who are very calibrated.

Second, I would also disagree with the idea of a European financial crisis in which the euro falls apart. That always seemed to be a knee-jerk reaction to problems in Europe among parts of the English-speaking world. It isn’t happening.

Other surprises: After a period of intense pain, there is likely to be a sudden and dramatic bull market in equities that continues for months. There also are likely to be a few waves of new COVID variants, as well as outbreaks of civil disobedience in Russia, China, Iran, and other autocratic countries. Finally, some very visible physical manifestations of climate change and their impact on cities and agriculture may just be too great to ignore. That may spur some real action on climate change, which hasn’t been seen yet.

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About Michael O’Sullivan

An independent consultant with two decades of experience in global financial markets, Michael O’Sullivan was most recently Chief Investment Officer in the international wealth management division of Credit Suisse. He also served as the lead contributor to the bank’s think tank, the CS Research Institute. O’Sullivan is an independent member of Ireland’s National Economic Social Council, author of several books, and contributor to journals including Foreign Affairs, the Financial Times, and the Wall Street Journal, as well as a regular guest on CNN, BBC, CNBC, and Bloomberg. His latest book, The Levelling: What’s Next After Globalization (Public Affairs, 2019), discusses the post-globalization era and outlines what comes next in politics, economics, finance, and geopolitics.

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Questions Asked During the Teleconference:

• What key macro trends do you see for 2023?
• Will the high inflation and the return or reappearance of the state in 2022 persist into 2023?
• Do you see the growing rift between liberal democracies and autocratic, dictatorial regimes widening or narrowing?
• Explain “macro unraveling.”
• What about technological developments?
• Beyond inflation and employment, what will you be looking at in Q1 as indicators of the future course of recession in 2023?
• How do you see financial services, from large banks to small lenders and fintechs, being affected by market dynamics over the next two years and beyond?
• To the extent you are able, can you identify some of the supply chain technology companies that pop up on your radar?
• What risks are people over- and underestimating?
• Do you think Europe will pick a side in the U.S.-China rivalry or try to navigate ambiguously?
• Why do so many commentators think the U.S. dollar is finished?
• Do you see a reemergence of the 2014-15 sovereign debt crisis among the so-called peripheral countries?