As we enter December, we are looking ahead to see what the world’s current crises have to offer us in 2023. The Chinese people are beginning to protest after two years of Covid lockdowns, which could have major implications for the political and economic stability of China. The market volatility we have experienced this year is leading us to reassess traditional investment strategies and rethink how successful or unsuccessful they could prove to be in the coming year. The outcome of the Russia-Ukraine war is still uncertain, but its impact on energy markets continues to shape European politics and the state of Eurozone economies heading into 2023. Finally, though climate issues have taken a backseat to geopolitical and economic crises this year, climate change remains a dangerous threat.

China’s Zero-Covid Policy Leads to Protests

Will China’s Protests Survive?

James Palmer, Foreign Policy

Xi’s Obsession With Control Produced China’s Protests

Howard W. French, Foreign Policy

Ending China’s zero-covid policy could unleash chaos

The Economist

In response to Covid zero policies enforced by Xi Jinping’s government, China is currently seeing its largest protests since the 1989 Tiananmen square uprising. The protests, beginning in Xinjiang province’s capitol Urumqi, flared up in response to deaths resulting from a fire, in which it is speculated that Covid zero policies specifically locked doors and barricades and prohibited firefighters from efficiently putting the fire out. The protests quickly spread to many cities, such as Shanghai, and included university protests at schools including the elite universities of Peking and Tsinghua, where Xi attended. The protests are notable as they have germinated beyond Covid zero protests to include calls for greater freedom of speech and even for Xi to step down as leader of the country. In response, Xi’s government has cracked down on the protests.

Ultimately, Xi’s government is at a crossroads. Should the government continue to enforce Covid zero policy, the impact both socially and economically could be significant. It is estimated that even if the Covid zero policies were ended today, the economy would not recover until 2024. While moderating Covid restrictions may work to appease the protestors and reconstitute civil order in China, moderation may likewise be viewed politically as weakness and, as a result, a challenge could arise to Xi’s leadership. Xi has committed to consolidating and managing power in a way that no Chinese leader has since Mao Zedong, restricting freedoms that had begun to be incorporated into Chinese society since 2000. Covid and the ensuing protests serve as a significant test for Xi’s government. Xi’s refusal to moderate and liberalize may result in China becoming stuck in the middle-income trap, while simultaneously destabilizing the country through authoritarian measures such as the Covid zero policy could lead to significant popular unrest. 

Is the 60-40 Investment Strategy Still Strong?

The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Akane Otani & Karen Langley, The Wall Street Journal

The Bond Market’s Recession Signal Is the Loudest in 40-Plus Years

Lawrence C. Strauss, Barron’s

US’ treasury yield curves have recently inverted to a point that has not occurred since the early 1980s, signaling that a recession is on the way. While bonds typically serve to mitigate downside trends in the stock market, even the 60-40 stock-to-bonds strategy has come under stress. The impact of those trends on personal investing with this strategy has seen its worst performance since 1937, according to the investment research and asset management firm Leuthold Group. Nonetheless, many advisors caution against abandoning the 60-40 approach as the strategy has shown significant resilience during prior financial crashes, such as with the 1974 oil crash and the 2008 financial crisis. Additionally, many clients that have bought during a financial crisis, when the market is undervalued, have profited richly. Ultimately, while bonds have not proven to be the hedge that they were in prior financial crises, they have still mitigated losses by 12% on average for 60-40 investors. Staying in line with fundamentals may therefore prove beneficial in the long run.

Don’t Underestimate Russia

Putin’s Doomsday Scenario

Alexander Gabuev, The Atlantic

Russia’s Dangerous Decline

Andrea Kendall-Taylor and Michael Kofman, Foreign Affairs

Russia may look weary from its war in Ukraine, but don’t let that fool you. Russia has experienced a succession of setbacks in its campaign – the Ukrainian Kharkiv offensive in the fall, and most recently, the Ukrainian’s successful recapture of Kherson. Indeed, Russia’s invasion has eroded its military, economic, and geopolitical influence. Moscow’s forces suffer equipment, experience, and personnel shortages from the war. The West has levied unprecedented sanctions against Moscow, creating long-term growth and innovation problems for the Russian economy. Additionally, Russia has lost control over its periphery nations in central Asia. All of these factors have created an urge for foreign policy analysts to dismiss Russia’s capabilities – but this is an erroneous assumption. The country is still a leader in integrated air defenses, electronic warfare, antisatellite weapons, submarines, and other advanced systems. Russia’s nuclear capabilities and willingness to use them must not be ignored either. The more vulnerable Vladimir Putin perceives himself to be, the more impulsive his actions could be. He has hinged his legitimacy and legacy on his invasion of Ukraine, spinning the conflict as an existential threat to the Russian nation. He is also emboldened by the belief that Europe’s energy crisis in the face of the coming winter will erode the West’s solidarity and support for Ukraine. So far, Western intelligence has not seen any sign of an impending Russian nuclear strike, but the more Russia is backed into a corner, the more dangerous it will act.

Europe Heads Towards Recession

The week that could unravel the global oil market

Derek Browner and David Sheppard, Financial Times

The costs and consequences of Europe’s energy crisis are growing

The Economist

In energy markets, the old order is crumbling and giving way to a volatile and uncertain future. Russia has weaponized its natural gas supply to Europe and the longstanding US-Saudi oil relationship is unraveling. Norms of the oil market have been upended in the last year: gas is still trading at five times the historic average, European Union (EU) nations are scrambling to find alternative energy sources and to protect their industries, and the US has used a great deal of its emergency oil reserves. Western nations will be attempting to impose a price cap on oil sold by Russia to further damage Russia’s energy revenues in response to their continued invasion of Ukraine. Russia, a country that used to provide up to 50% of the EU’s gas imports, now only supplies 15%. Europe has fought against this loss by securing gas from third parties and decreasing their gas usage and power consumption in general. Sectors of the European economy that rely on natural gas for production, such as chemicals, metals, and ceramics, have been greatly damaged by the gas cutbacks. The EU has heavily subsidized various industries and households to stave off the worst effects of its energy crisis, but this will also have the effect of increasing inflationary pressures on Europe. Analysts predict Europe will have to contend with a recession in the winter and economic stagnation in the spring as various market forces exact their toll.

COP27 Developments

In a First, Rich Countries Agree to Pay for Climate Damages in Poor Nations

Brad Plumer, Lisa Friedman, Max Bearak, and Jenny Gross, The New York Times

A Clash Over Degrees: How Hot Should Nations Allow the Earth to Get?

Brad Plumer, David Gelles, and Lisa Friedman, The New York Times

Egypt hosted representatives from nearly 200 countries this month for COP27 – a large-scale climate conference. The main achievement of the conference was the agreement to establish a fund to help developing countries deal with climatological disasters exacerbated by the pollution of developed countries. Developing nations have been pushing for “loss and damage” money for over three decades, facing pushback from wealthy greenhouse gas emitting countries such as the US, which feared that nations would be held legally liable for payments. However, this deal stated the opposite and called for a committee made up of representatives from 24 countries that would structure the fund over the next year. Pakistan, which experienced extreme flooding made worse by global warming, spearheaded the push for the fund. Western nations argued that China should not benefit from the fund, as it is currently the world’s largest emitter of greenhouse gases.

Additionally, there was a sense of backsliding on climate commitments from major polluting nations at this conference. In the 2015 Paris climate agreement, nations endorsed the goal of keeping global average temperatures from rising more than 1.5 degrees Celsius above preindustrial levels – a rise that scientists say would make heat waves, water shortages, and coastal flooding even worse. This year at COP27, the US and EU countries pushed to keep the “1.5” on a final agreement, but nations such as China and India resisted their efforts, fearing that the US could be an unreliable partner. Furthermore, keeping the 1.5-degree mantra would incur costly steps for nations, requiring extensive overhauls of global infrastructure at an unprecedented scale and speed. Global CO2 emissions reached a record high this year, and the planet is on track to increase by 2.1–2.9 degrees Celsius by the end of this century.