Four Geopolitical Hotspots That Could Impact Markets in 2023

December 6, 2022 | By: Greg Valliere

Four Geopolitical Hotspots That Could Impact Markets in 2023

Russia’s war on Ukraine remains the top risk facing investors, but there are other potential threats to keep an eye on.

Some major questions for the financial markets may be answered next year: the Federal Reserve seems likely to cease its rate hikes by late winter; the political climate should be relatively quiet before the next U.S. elections in 2024; and the gridlock in U.S. Congress is likely to persist, without passage of radical legislation. That leaves one huge wild card – geopolitics, which the markets will have to carefully monitor next year.

A world map highlighting geopolitical hotspots that could impact markets in 2023 - Russia, Ukraine, Iran, China, United States and North Korea

Ukraine War
The greatest uncertainty, obviously, is the bloody war in Ukraine, which could cripple the Western European economy this winter, while exacerbating inflation pressure on grain, natural gas, metals and other commodities that are in short supply.

There are several plausible scenarios in the war: Russia could double down, using more lethal weapons while destroying Ukraine's power grid; the U.S. and other Western European countries could tire of huge contributions to Kyiv; or Vladimir Putin could be ousted. Our sense is that the staggering casualties on both sides will eventually lead to a truce and protracted negotiations, perhaps lasting into the summer. The status of Crimea will be key in any peace talks.

We have believed since last February that Russia cannot win this war, and that still appears to be the case. Quite simply, Russian troops are not willing to die for Putin, while Ukrainian soldiers are willing to die for their country. The humiliation of Putin, as young Russian men flee their country, eventually will lead to a deal – but, unfortunately, a deal does not appear to be imminent.


Iran Protests
Meanwhile, other geopolitical challenges will persist. The Ukrainian war has obscured the slaughter, torture and imprisonment of young Iranian protesters, as Tehran uses live ammunition with impunity. In addition to the domestic unrest, Iran faces a de facto war with Israel, as both countries use drones to attack each other; several Iranian nuclear scientists have been killed as Tehran gets closer to producing a crude nuclear bomb.

A delivery mechanism for an Iranian bomb hasn't been perfected yet, but its uranium enrichment has the Persian Gulf on edge, and Tehran's shipment of missiles to Russia has almost certainly ended prospects for a nuclear treaty between the U.S. and Iran.


U.S./China Trade Relations

A wild card has emerged in recent days: angry protests in many Chinese cities over Beijing's harsh COVID restrictions. We don't think there's a serious threat to Xi Jinping’s authority -- he's prepared to crack down -- but Xi also will have to relent on the lockdowns and focus on improving China's erratic economy, which is a major concern in global financial markets.

Meanwhile, relations between the U.S. and China are unlikely to improve dramatically next year, as the slim Republican majority in the House seeks to crack down on Beijing's trading practices and espionage. In addition, Republican leader Kevin McCarthy has hinted he will visit Taiwan next year, which would be viewed by China as a provocation, similar to – or worse than – Nancy Pelosi's visit last April.

We think Xi Jinping is unlikely to move against Taiwan any time soon, but a meaningful thaw – or trade liberalization – between Washington and Beijing seems doubtful next year. And rocky relations may persist between Ottawa and Beijing.

North Korea
A complicating factor will be the periodic outbursts from North Korean leader Kim Jong-un, which will keep Japan on edge for the foreseeable future. Even China’s Xi curbing the erratic Kim is unlikely.

With these geopolitical threats, it's virtually certain that defense spending will continue to rise dramatically in Washington. Outlays may hit US$800 billion in this new fiscal year, with both political parties agreeing to even greater spending in the next two or three years – much of it devoted to shipbuilding, to counter threats in the South China Sea and the Persian Gulf.

Major new spending is increasingly out of favor in the U.S. The new Congress will tighten fiscal policy next year (after a spending binge before lawmakers leave town in mid-December of 2022). By 2023 the focus will return to geopolitics, which will be a source of uncertainty for the markets, which of course hate uncertainty.

Greg Valliere
Greg Valliere
Chief U.S. Policy Strategist
AGF Investments
Chief U.S. Policy Strategist

Greg Valliere joined AGF Investments (AGF) in February 2019 as Chief U.S. Policy Strategist. In this role, he is responsible for providing insight into how U.S. politics are shaping global markets.

He brings a unique perspective to AGF with more than four decades of experience analyzing policy and politics providing regular commentary and insight into Washington for financial services and investment management clients globally, including specialized coverage of the Federal Reserve, economic policy and politics. Greg began partnering with AGF in 2017 advising investment management teams on policy and the impact on global markets, providing daily market commentary for financial advisors and participating in numerous client events and roadshows.

Greg has more than 40 years of experience following Washington issues for institutional and retail investors. He is widely quoted in U.S. media and specializes in coverage of the Federal Reserve, tax and spending issues, and politics. Greg is based in Washington, D.C.

The views expressed in this document are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.

The commentaries contained herein are provided as a general source of information based on information available as of December 6, 2022 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

This document may contain forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed herein.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income, and balanced assets.

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RO: 20221128-2607688

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