“A summary of cinematic incidents in 2022 and a realistic outlook on what to expect from technology moguls and financial giants during the impending recession in 2023”
The Stock Market
US Market: S&P 500 & NASDAQ
Let’s start with a summary of how the markets moved through and closed out in 2022. The bear market peaked as the year opened, with declining prices since. Exacerbated by the worries of a recession and rising inflation in the Western sphere, sharp drops in the market were observed in mid-June and end-September.
In the US, tech-heavy indices like the S&P 500 and NASDAQ mirrored the information technology sector’s heavy weightage in the US markets and their poor performances overall. The S&P500 closed out at 19.95% at 3839.50, while NASDAQ was down 33.89% at 10.466.80. Fundamentally, a slowing economy means that demand for the tech-based products and services that undermine this new internet age will falter. Furthermore, due to high inflation, confidence in riskier technology stocks parallels the fall of cryptocurrencies and faltering confidence in a unique decentralised, unregulated internet. Risk adversity means a shift of investments away from companies pivoting towards speculative ventures like the Metaverse has taken a considerable hit. Despite torrential layoffs in technology sectors towards the end of 2022, US unemployment is generally at a half-century low. Heading into 2023, the strength of the US labour market relative to its European counterparts is a double-edged sword as this drives wage-based inflation. In the face of a looming recession, the Fed cannot be too quick to loosen its monetary policy, as this will rattle inflation expectations.
UK Market: FTSE100 & FTSE250
Over in the UK, the FTSE 100 positive reflection inaccurately depicts positivity in a tumultuous political and economic environment. The Ukrainian crisis has been a big plus for the energy and defence sectors. Defence contractor, BAE Systems, rose by 55% this year to become the best performer in this index. Additionally, the FTSE 100’s skewed composition towards such stocks means that the skyrocketing energy prices, which have boosted the performances of coal companies, resulted in the index closing out 1% higher than it started the year. If the FTSE 100 reflects the dangerous European market, the FTSE 250 would better reflect the UK’s poor economic fundamentals, given its heavier composition of local companies. The latter closed the year down 19.7% from when it opened in 2022.
The political flipflopping this year reflects a vital lesson in economics, expectations are just as important, if not more crucial than what we see in front of us. In October, we saw the shortest reign of a Prime Minister with Liz Truss. In theory, her bold expense-driven policies, like capping energy bills and buying long-term UK, would be great for promoting long-term growth, but they would have cost a combined £ 125 million. Accompanied by promised tax cuts, uncertainty on how these policies are being funded only increased short-term instability as sharp political and economic confidence declines were observed. International students could only be thankful as the Pound’s value tanked in this period and a revamp was undoubtedly in order. New PM Rishi Sunak’s experience in the market shines through as he restored stability quickly with conservative plans on spending. To the layman, the all-time high interest rate of 3.5% set in December seems terrible. Still, monetary policy expert, Dr Ricardo Reis, believes that a slowing rate of increase in interests rate should inspire confidence that the Bank of England is on the right path. For economists, overshooting expected inflation targets is what brings down inflation rates in the long run back to a steady pace.
Undoubtedly, the catalyst for the global market downturn would be Russia’s invasion of Ukraine on February 24. Russia’s position is one of the world’s largest energy providers, supplying 17% of the global gas supply and 12% of global oil supplies. International sanctions following the invasion resulted in spiking energy prices that threatened global economies. International aid also meant that the Ukrainians could hold out against the Russians, prolonging what was meant to be a Blitz from the Russian’s side. Unfortunately, the resolution is nowhere in sight, and as of December 8, Putin himself stated that Russia was predicting invasion to be a “long-term process”. With the end nowhere in sight, a recession is impending for European states heavily dependent on energy imports. We can expect the recession to spill over into the US and Asia markets as well, given the disrupted commodities supply chains accompanied by decreasing consumption from prominent global players like China because of lockdown restrictions. The best response for central banks is to avoid overacting to the inevitable. Instead, maintaining inflation targets while avoiding a financial crisis should be the primary goal.
APAC Market: China & Japan
Throughout the year, capital has creeped its way out of the traditional hedge fund havens in Hong Kong toward the safe and stable Singapore. Hong Kong’s political alignment with China means radical lockdown protocols and reduced economic activity are shaking business confidence. Goldman Sachs estimates that their investors in Singapore have moved almost $4 billion in assets as of September 2022. Singapore’s clear regulatory frameworks and longstanding political stability have proven its attractiveness as a perfect habitat for the new generation of venture capitalists and disruptive start-ups to root themselves in for long-term growth.
APAC closed out the year with two big moves that will set the tone for the 2023 market outlook. Firstly, following the White Paper protests, China has eased Covid restrictions, bringing optimism back into the Asian markets. China’s return to the global supply chain will bring about higher demand for commodities and thus ease global inflation. That said, it is essential to stay weary as the transmission rate is high, with 18% of the population still infected with Covid, providing strong evidence that economic activity in China may remain slow for at least the first quarter of the new year.
The second shocking news is that the Bank of Japan has deviated from its longstanding yield-curve control policy in response to rising market volatility and “to ease bond market functioning”. Traditionally, Japan has fought to maintain the 10-year government bond yield rates at 0.25%. By allowing it to rise to 0.5%, Japan could be trying to restore some strength to the Yen, thereby curbing the expected surge in the inflation rate at the expense of weaker performances from the Japanese equity market.
Green Finance Market: Renewables
The year kicked off with a rude awakening for large corporates in February when the Corporate Climate Responsibility Monitor revealed their integrity levels regarding net-zero initiatives. It was revealed that 25 of the largest companies are responsible for 5% of global emissions. This set the tone for the year to cut down greenwashing throughout the year.
The Russian crisis sparked a push for renewables and has accelerated massively because energy consumers realise the value of renewables as a genuinely long-term alternative. The demand created by the crisis coincides nicely with increasing projections for wind and solar production capacities, rising by 30x and 4x, respectively. In the UK, although 40% of energy comes from cheaper renewable sources like hydropower, biomass and wind energy, prices are still as high as ever because gas demand has risen. Additionally, there are sceptics surrounding the labelling of biomass as a renewable source since it produces high amounts of carbon dioxide in production.
By November, financial plans by the Glasgow Financial Alliance for Net-Zero began falling in place to chart out a sustainable plan for the development and adoption of renewable. Financial players with a combined total of over $150 trillion in assets came together to set guidelines on green capital financing models, portfolio regulations and investment plans to grease the wheels of decarbonisation. Almost poetically, a scientific breakthrough came through in December to move us closer to clean energy generation from nuclear fusion.
While nuclear fusion is still years away, looking ahead immediately to 2023, more than ever, ESG should be treated as a metric for underlying long-term valuation rather than just a marketing gimmick. This is a very uncertain year for sustainable investing as global markets are headed into a recession. It will be interesting to see if companies will stick to their financial commitments to sustainability.
The Crypto Market
Cryptocurrency Market: Bitcoin & Ethereum
Calling this season a crypto winter would be a tremendous understatement and a disservice to the companies that have failed so spectacularly in 2022. Bitcoin and Ethereum are down 59.78% and 63.82%, respectively, from the start of 2022. It would be hard to focus on key numbers to follow in the decline of cryptocurrencies, so instead, let us summarise the year with two crashes that reshaped the cryptocurrency landscape.
In May, the Luna, a cryptocurrency heavily connected to the TerraUSD stablecoin, crashed when $ 2 billion worth of TerraUSD was unstaked. The stablecoin could no longer maintain its algorithmic peg to Luna. Thus, large amounts of the coin were sold off, causing $ 300 million worth of cryptocurrency to evaporate in a single day. This set off a series of crashes and exposed some of the shadiest companies to ride the overleveraged crypto wave. Most shockingly, the founders of Three Arrow Capital in Singapore, a land known for stringent regulations, evaded the law after amassing a $3.5 billion debt, leaving their $500 million superyacht. The extravagant lifestyles fuelled by moon-shots were beginning to unravel as the layman became warier of the risks of these companies run by hot-blooded crypto-enthusiasts.
The piece de resistance came in November with the collapse of FTX following a brief Twitter feud between Binance CEO, CZ, and FTX founder, Sam Bankman-Fried. In short, CZ pulled all his FTT tokens, the tokens of FTX, causing bank runs and exposing FTX’s illiquid position. The irony is that the company that was helping to bail out previous crashes like Voyager and BlockFi ended up being built upon the foundations of poor accounting principles and a deceitful business model to use deposits to prop up a sister company, Alameda Research.
Singapore has long been a leading figure in digital innovation. At the FinTech Festival 2022, Ravi Menon from the Monetary Authority of Singapore (MAS) made a clear stance moving forward. Evidently, the oxymoronic paradigm of regulation in decentralisation must be resolved to restore confidence in cryptocurrencies and truly unlock digital financial assets’ economic benefits. The goal of regulation should be to leverage the benefits of reduced risk and increased efficiency that digital assets bring by trimming out speculative trades to protect consumers.
Over in Europe, consumer protection is also the name of the game, but their Financial Services and Markets Bill and the Economic Crime Bill focus on creating more levers to enforce the law instead of outright behaviour enforcement. Regardless of approach, heading into 2023, more regulation is precisely what crypto natives are hoping for to weed out companies trying to take advantage of decentralisation, restoring confidence to the digital asset market.
Africa has been a perfect greenhouse to test the limits of Bitcoin’s potential. The most notable use cases of cryptocurrencies would be the Central African Republic’s announcement to adopt Bitcoin as its legal tender in April 2022, joining El Salvador, who did the same in September 2021. In El Salvador, over 70% of the country was unbanked when the experiment began. It would be easy to criticise these countries from conventional economic theories that state currencies should have a stable value, given the 60% drop in value. However, for developing countries like those in Africa, building new infrastructure on Bitcoin gave it the potential to move away from its country’s overreliance on the performance of larger countries’ currencies, enabling it to make independent trade decisions and remarket themselves as “crypto islands”, inviting capital flows as well.
A muted version of this would be Central Bank Digital Currencies (CBDCs). Cryptocurrency use cases are becoming more popular amongst the less privileged because of the promise of financial inclusion. Transactions through CBDCs are not only device agnostic, and P2P transactions are much cheaper, and social transfers could be done more efficiently. Although there are no strong use cases, this is a space to keep an eye out when crypto makes a comeback.
Cryptocurrencies should be set to remain quiet for the foreseeable 2023 due to relatively high-interest rates across economies. Still, given that most interest rates have peaked in Q4 2022, there is a reason for some optimism. This period is the growing pains of market maturity surrounding digital assets and blockchain. This is when protocols and firms that have unlocked actual, meaningful value based on the underlying technology of digital assets will rise because crypto-focused venture capitalists will take advantage of the low valuation of these sleeper companies. When confidence is low, the only way to drive revenue is by having a genuinely innovative product use case. Two products to watch will be Blockchain-as-a-Service in retail, given the prominence of digital twins, and proof-of-stake mechanisms that will support the rising importance of ESG movements for emissions tracking.
Additionally, Bitcoin halving is on track for 2024, where the number of Bitcoins entering circulation per mine drops from 6.25 to 3.125. The squeeze on supply should drive prices up, assuming demand has stayed relatively high over this period. Therefore enthusiasts should be eagerly awaiting this drive to restore returns in the market again.
In Other News…
Technology trends are always exciting for private capital and M&A. With so many developments across the year, here are four innovations that will be transformative or disruptive heading into 2023.
Artificial Intelligence: ChatGPT
The crème de la crème of predictive algorithms. ChatGPT broke the million user mark in just five days of its launch and the hearts of many coder teachers worldwide as we saw the power of Natural Language Processing and Machine Learning in generating information. ML and Artificial Intelligence (AI) have proven their worth in niche use cases, like AlphaGo, a machine that retired a Go champion. Still, for the first time, we are at the cusp of completely transforming how we attain information. I akin this machine to the legendary Move 78 by AlphaGo, a move that realistically no human would ever be able to assess in a reasonable amount of time because of how much information AI can handle at a time. Now imagine that from a Go board but transposed for the data on the internet.
The amount of automation and time-saving potential that ChatGPT brings to society is immense. Time spent on manual research and coding can be cut significantly, leaving for either a higher generation rate of ideas or more time to stew on new angles and innovations.
With great power comes great responsibility; on the flip side, the potential for unintended harm is also immense. When technology embeds itself into our lives, we will need greater ethical considerations to drive the product development processes. Should ChatGPT become a mainstay for businesses and learning, I foresee the institutionalisation of existing information biases should information go unchecked. Humans can spend less time writing nuances and information mining and shift their attention to auditing instead, ensuring that the data generated is balanced, holistic and, more importantly, accurate. This seems counter-intuitive to the purpose of AI in the first place, but establishing control of algorithms rather than letting algorithms control our behaviours will be a balance we need to strike as developments become more sophisticated.
How we make a transaction is not just about currency but method. Payments have risen to the forefront of technology innovation in tandem with the increasing popularity of cryptocurrencies. Buy Now Pay Later schemes have become an increasingly popular way for payment systems and card providers to try to acquire a customer by enabling their consumerist behaviour. Breakup transactions into small chunks at low to no interest rates make spending appear more effortless on the wallet and, for some, better in financial planning.
From making payments to receiving them, platform innovations have also enabled a new avenue to explore social impact innovations. Over in Indonesia, Earned Wage Access has been the latest trend revolutionising financial literacy and flexibility. Wagely, the most significant player on the market, raised $8.3 million in their series A round to enable a pay-as-you-earn scheme and integrate services like loan instalments and insurance management all on one platform. Another start-up, GajiGesa, focuses on Earned Wage Access specifically for unbanked Indonesian workers, protecting them from predatory lenders.
Payments will be the sector to watch in 2023 for three big reasons. Firstly, accounting auditing is on red alert following all the scams that came to light amongst cryptocurrencies and fiat currency platforms will be under scrutiny as well. Identifying businesses making a positive impact while making a profit from an exploitative platform will be subconsciously on investors’ minds, so we can expect only smart money to flow into good businesses. Secondly, payments are heavily determined by behavioural economics principles. Service offerings are flexible because new payment methods can be constantly innovated to adapt to consumer behaviour. In light of increased datafication of businesses, this will make their business models much more resilient.
Chips: Edge Computing
Cloud computing has been a hot topic for years, but recently, a focus has been on bringing some of the analytics in the cloud back down to earth. To put it simply, edge computing tools are workloads conducted in closer physical proximity to where data centres are. The benefit of this is latency and data management. By performing analytics at the edge, there is a significant time reduction for real-time analysis. Furthermore, only crucial information will be sent to the cloud for storage, making data management much more efficient.
The US has a $280 billion CHIPS act to promote internal support of the semiconductor industry and China is set to respond with a familiar $140 billion investment for itself. One strong headwind for this industry’s development is the fragmentation of the global chip supply chain. Like internet regulation, chip monopolisation and trade wars have segmented the technological development of storage systems into a western and eastern front. If we look at technological developments trends, China stands to lose out in the long term, but it has one out over the Americans, Taiwan. TSMC is one of the US’s largest semiconductor suppliers, and China’s interest in seizing Taiwan would put the US into a predicted 5% to 10% loss in GDP.
Innovation may drive the world, but politics enables innovation. Ideas and tensions move independently, but we will never know when geopolitical situations could completely derail global supply chains.
Data: Space Technologies
The data boom of the past few years has seen us mine data from computers to faces, and the next ventures could bring us back to the moon. After years from our orbital friend, progression in data analytics and collection tools has reopened the possibility of making ground-breaking discoveries for science or even exploring the possibility of life in space.
Space technologies intersect powerfully with climate and geopolitical policy developments because instruments like satellites can source new information on carbon emissions, migration and geospatial data. Besides new data streams, satellites are nodes in the sky to enable communication and broaden the potential of connectivity. With the race to 5G more competitive than ever, looking to the stars could be the next step.
As with all frontiers innovations, a great idea is always followed by the question, is this financially viable and meaningful? Units of investments will be in the billions hence these projects must pan out and generate substantial value to justify these financial and natural resources. A strong signal that tailwinds are starting to blow is that even Singapore, a small nation, is looking to invest in Very Low Earth Orbit (VLEO) satellites. Singapore’s marquee VLEO project could be their chance to show off their technology development capabilities and innovation leader in Asia. Understanding space policy interwoven with existing technology laws will be a vital next step for countries striving to break into the space race.