Market Risks to guard against in 2023: Millions of strikers around the world demanding higher wages
For now, Wall Street investors who have positioned themselves early for a big comeback in risky assets this year may be underestimating a big threat: millions of strikers around the world demanding higher wages...
This is despite signs that inflation may be peaking, leading a growing number of market participants to believe that 2023 is the year for a rebound in global equities. But some strategists now worry that rising labor costs will curb outflows from safe-haven assets and into assets that thrive in an upswing.
Warning signs abound, with many major economies now facing the threat of mass strikes.
In a Labour dispute in Germany alone in recent months, some 900,000 people threatened to strike before the country's biggest unions and employers agreed to an 8.5 per cent wage increase. At the same time, strikes are being called from railway workers and Starbucks baristas in America to truck drivers in South Korea and "all walks of life" in Britain.
As a result, President Joe Biden had to sign mandatory legislation this month to prevent rail workers from striking. The UK has even turned to the military to minimise disruption to public areas such as airports.
According to one count by industry insiders, the number of labor strikes in 2022 was the highest since 2015.
Is' stagflation 'behind the strikes?
The answer to why strikes are likely to act as a headwind for risky assets such as equities this year lies in the theme that will haunt global markets in 2022: inflation. Even if that were combined with this year's recessionary theme, something even scarier could be on the horizon: stagflation.
The strikes themselves could throw supply chains into chaos, and if the strikers' demands are met, wage rises are likely to follow, potentially triggering a wage-price spiral.
"This could be the defining battle of 2023 -- the battle between labor and employers," said John Vail, chief global market strategist at Nikko Asset Management. "If wage increases are approved, it could eventually lead to stagflation, which would be negative for both bond and equity markets."
Indeed, at their rate-setting meetings last month, both Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde highlighted the key role of labor costs in future policy making.
Kristina Hooper, chief investment strategist at Invesco, noted that the central bank sees labor as the hardest part of the "inflation equation" to solve. Now, with a tight labor market, workers have more leverage over pay raises.
Shane Oliver, head of investment strategy and economics at AMP Services, said the current wave of worker protests was reminiscent of strikes against economic liberalization in the United States, Britain and Australia in the 1980s. Oliver has a 40-year career in the financial markets.
"We may have entered a world of more industrial strife," he said. This is bad news for investors because it will prolong the period of high inflation."
How big is the market impact?
"A longer period of higher interest rates could mean bond yields rise again, which would be bad news for investors in government bonds and risky corporate debt," Oliver said.
It would also allow for the continuation of defensive trading and value investing, he added. And that's going to be a very hostile environment for growth stocks.
Michael Mullaney, head of research at Boston Partners, thinks stocks that are more cyclical will do well if 2023 is a sustained year of high inflation.
Nikko's Mr Vail said cash assets would also gain new appeal, a successful trade almost half a century ago when high inflation and low economic growth combined to drag down markets. "If you were investing in the late 1970s, the best thing to do was put your money in a money market fund. Short-term interest rates tend to rise in a stagflationary environment."
What's more, given that inflation tends to push commodity prices higher and a weak economy weakens demand, it's harder to decide whether to put money into physical commodities, he said.