Key Macro Risks For Tech Industry in 2023

The macro-environment saw a rollercoaster ride in 2022, one where our Counterpoint Macro Index dropped from 106.17 to 82.88 between January and November. Several factors contributed to the decline, such as the war in Ukraine, high inflation, the possibility of a global economic recession, and China’s strict COVID-Zero policies.

Besides, interest rate hikes by the Federal Reserve not only slowed economic growth but also strengthened the US dollar, the effects of which were particularly painful in emerging markets. Technology firms that were previously thriving had to resort to mass layoffs, spending cuts and downward earnings guidance in preparation for a bleak economic outlook.

Moving into 2023, which of those macro risks will remain, and which new risks should the tech firms watch out for? Counterpoint Research analysts have voted on the top 10 macro risks that companies should pay close attention to.

In the latest episode of The Counterpoint Podcast, host Matt Orf is joined by Senior Analyst Yang Wang, based in Europe, and Research Analyst Archie Zhang, based in China. We bring on-the-ground and unique insights into the macro risks that cannot be ignored. The topics discussed in the podcast range from economic issues such as energy crisis and a potential global economic recession to geopolitical and political issues such as the US-China showdown and developments in US domestic politics.

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Transcript

Podcast Transcript - Key Macro Risks That Could Impact the Tech Industry in 2023

Matt: [00:00:13] Hello everyone. Welcome to “The Counterpoint podcast” Happy New Year from the “Team Counterpoint”. I hope you had a great Christmas, and a New Year's holiday. As we start 2023, we're gonna be approaching the tech industry from a slightly different vantage point, that of our macro environment team. For those of you who might not know, counterpoints, global team of analysts track and analyze key macroeconomic and geopolitical trends to predict what the impact might be on the technology market using Counterpoint’s Macro Index, a metric of over 130 leading indicators of economic, political, and business.

We saw our macro index plummet during the depths of the Covid 19 pandemic and a sharp rebound during the recovery. More recently, Counterpoint’s macro index has hit new lows due to inflation war, poor tech earnings, and other factors. Looking forward to the new year. Our macro team surveyed Counterpoint’s team of analysts regarding the biggest risks that could disrupt the technology industry in 2023.

In today's podcast, we'll dive into the results and discuss how we see these trends developing in the coming year. I'm your host, Matthew Orff, and joining me today are two colleagues. First, we have senior analyst Yang Wang, based out of London. Hey Yang, how are you? 

Yang: [00:01:30] Hey Matt. Thank you for having me. It's.

Great Christmas here. Weather's not so great in London as per usual, so we've been hunkering down and adding weight. But good to know that we've had a good Christmas and I hope it's the same case at yours. 

Matt: [00:01:44] Thanks yes, great. Had a great Christmas weather. Bit of a challenge here as well. Very cold, but a good excuse to spend time with family.

But super. Today we're also joined by research analyst Archie Jang, who is based out of Beijing. Hey Archie, how are you? 

Archie: [00:02:02] Hi Matt. Thanks for having me. So I'm doing good. I just recovered from Covid and finally like China just made up this month to leave with the Covid. I think we are going to touch on this topic later.

Matt: [00:02:13] Yes, I'm sure we will. And yeah, glad to hear that you're feeling better. All right, well, thank you young and Archie for joining the podcast. Before starting, let's go over the top risks in order of importance according to our survey of analysts, which we'll then discuss more in depth afterwards. So topping our survey our concerns about a global recession. And second place was US-China relations. And third, emerging markets pain. Fourth upcoming energy crisis. Five, China's disorganized withdrawal from zero Covid. Six Tech earnings retreat. 

All right. Let's start off by talking about the potential for a global recession here in 2023, which was ranked as the biggest risk to the industry in this year. Yang, you've been following this topic closely. What are the factors that are contributing to an economic downturn in 2023, and what is the potential impact? 

Yang: [00:03:09]  Well, Matt, if. Focus our minds on this time last year, and you are to tell me that the inflation rate would hit almost double digits in the US or Europe. Interest rates by central banks would hit four or 5%. I, you know, I would've thought, you know, you went crazy. , but this is a situation where we are, so things have changed a lot over the past 12 months. Inflation has peaked in different places or in some places they're actually, they're still going up, but overall, globally except over a few places, inflation is very high, probably among the highest rates within one or two generations going back to the 1970s. 

But let's think about what has driven high inflation around the world. It's energy. We will talk about this a little bit later. Labor shortages, which really started from the onset of covid. We know of cases of long covid, people falling ill, and also lot of the elderly labor population.

Just deciding to not turn up to work and also supply chain issues. Now I'm not just talking about tech supply chain, but supply chain in general. Case in point, I'm trying to install solar powered system in my house and I've been waiting for four months. And top of it, a water cylinder that's supposed to support it cannot arrive until March.

So these are some of the supply chain issues and bottlenecks that are still around in some corner of the global economy. So we have a range of issues, but it seems like globally economic policymakers are really thinking of only one solution. Rate hikes. Now, much has been written about this from the Federal Reserve and also the European Central Bank.

Now there could be a case that red, the rate hiking cycle might be coming soon, but still, a lot of things are still hanging in the air. And higher rates is a lot of pain for businesses and consumers in general. But I think if we look at the situation in 2023, high-interest rates and still uncertain rate hiking regime in most of the big economies in the world will continue to be a huge risk for the economy and of course for the tech environment. 

Archie: [00:05:30] So Yang, how is it likely to affect the technology world? So our analysts ranked tech earnings retreat, a six-hour survey of the risks. 

Yang: [00:05:40] Of course, when it comes to the tech world, it is, it's quite interesting because it's when you look at the post-pandemic world, it's really two phases now.

The first phase was you look in general at the tech world. The post-pandemic boom was pretty spectacular. It seemed. Much of the tech industry was immune to economic problems when much of the world was under lockdown. One of the reasons we can think about this is tech really provided solutions, to the world when we were locked down at home and digital infrastructure held up.

And digital life flourished. But after this, much of the world was still under the regime of easy monetary policy. So some of the tech companies felt that they could take advantage of this and expand higher a lot of people and make very ambitious CapEx spending efforts and also hike to revenue forecasts.

And if we turn the clock, this year, 2022 and 2023, a little bit ahead. We can see that there has been a sudden retreat in consumer and corporate spending on tech, and we have seen very highly publicized layoffs among the biggest companies in tech. I think this really is a case of projects and hiring plans that were not really well thought of, especially in terms of Ally and also because of easy monetary policy.

Some of the zombie companies probably propped up and chicken has come home to roost and they are facing a situation where consumer demand is not there. But if you look at 2023, I think there's still pretty positive about the likelihood of a rebound because the tech industry is the first among many to right-size the company sizes and also the tech industry has been pretty swift in cleaning their houses internally. So I do think that as the economy rebounds the tech industry and earnings will pose a swift to rebound too, because tech always manages to provide the solutions to the next biggest problems. For, for humanity. And those are my views. So as I've spoken, one of the leading contributors to a global recession, otherwise eco or energy problems, which can mean as the fourth biggest risk to the techno industry in 2023.

Matt, I know you have been tracking this issue in, in detail, so could you share a little bit about what the energy situation is globally, including where the pressure points are, as well as how those pressures may develop throughout 2023. 

Matt: [00:08:17] Absolutely. So if we look back at 2022, we can get a good idea of some of the key trends that are likely to drag on into 2023. So the energy crisis that we're kind of currently facing originated really at the start of the war in Ukraine, back in early late winter, early spring of 2022. So with the war in Ukraine, energy supplies to Europe, which has and the past several decades, very dependent upon Russian fossil fuels for energy supplies, that supply of energy became, you know, very disrupted.

You know, at points we've seen the amount of natural gas flowing into Europe. First, you know, slowly get cut and then cut off completely with the Nord Stream pipeline fully stopped and the result has been, you know, skyrocketing utility prices for consumers as well as for producers and Europe especially.

But this is having global ramifications, so the impact is not in Europe. We've seen oil prices go up significantly to over a hundred dollars a barrel during the summer of 2022 up significantly, and this trend of high oil prices, disruption to energy supplies is likely to continue through 2023. As the war in Ukraine continues with no end kind of immediately in sight, though these energy pressures.

Could potentially put pressure on Ukraine and Russia to come to some sort of an agreement. In addition to the war in Ukraine one of the other issues that we've seen arise is in October, OPEC announced an output reduction, which is putting further pressure on oil supplies globally. So in anticipation of kind of slowing demand as a result of the oncoming or expected global recession, OPEC announced back in October that it was going to cut production by 2 million barrels per day, which was the biggest cut to oil production since the start of Covid 19. 

The result in Europe and in the United States. There were concerns about what this would do to the cost of oil, but we've actually seen prices stay, for the most part, consistent as there has been a subsequent drop in demand for oil.

Now going into 2023, we have to consider what oil needs are going to be, what energy needs are going to be, as we'll talk about a bit more in depth with Archie. Later, we're going to see a pretty significant rebound in demand from China, especially in the second half of 2023. If energy supplies continue to be disrupted due to an ongoing war in Ukraine, the additional.

Demand for oil, especially from the Chinese economy, could additionally put pressure on oil sending prices higher. There have been a couple of other trends that have resulted from this disruption to kind of traditional sources of energy. One of the biggest things that we saw in 2022 was increased investment and policy action regarding renewable.

So in the European Union, we saw the Repower EU plan, which was passed or came out in early May of 2022, and plans to reduce reliance on Russian fossil fuels while also increasing renewables. From 40% to 45% of energy production by 2030 in the US, The Inflation Reduction Act included major policies on energy, including new clean energy tax credits, which are expected to have a major impact on the United States total emissions reductions.

For 2030, I think one statistic that was interesting that I saw is that the Inflation reduction Act would increase current emissions. So the current trajectory the US is on is for 24% to 35% reduction in emissions by 2030. After the inflation Reduction Act, the estimate went up to 31% to 44% emissions reduction.

So a very significant drop in emissions with these new policies and the Inflation Reduction Act. And this came from the bipartisan policy group. So what this means is in 2023, we're likely to see continued investment in renewable energy sources, especially solar and wind, and we could see further movements from governments to adopt renewable energy, especially as concerns about geopolitics kind of abound.

So one of the other major trends that we saw in the adoption of renewable energy is that many governments are starting to realize that having a domestic supply of renewable energy is very important to the smooth functioning of their economy. So, you know, global events like a war in Ukraine causing disruption to energy supplies this would, this risk would be less if, you know, producing renewable energy at home that's less dependent on, on global markets. So, What else does this mean for 2023, renewable energy will have another strong year in 2023. Oil and fossil fuels between OPEC and with the war in Ukraine likely to be another flashpoint could see rising oil prices, especially in the second half of 2023, as China's economy fully comes back online. Another thing we might see is one major point with renewables as well is the focus on electric vehicles. Renewables have been a great focus in 2022 and will be into 2023. Electric vehicle adoption may actually struggle in 2023 due to rising input costs. 

We saw throughout 2022, that several key materials such as lithium saw major increases in prices over the course of the year also related to the war in Ukraine. Price continues to be a major barrier to adoption of electric vehicles and with rising input costs, this could continue to be a barrier through the next year. I think that that, for the most part, sums up the key kind of flashpoints and energy for the coming.

Yang: [00:14:36] Okay, thank you Matt. Very detailed explanation. You've mentioned geopolitical issues and that actually relates to the second largest risk to the tech industry in our survey, which is US and China relations. And Matt, I'm gonna throw this back at you again. You've also been tracking the Biden administration's Technology and Trade Policy with China.

Can you give us some background on the situation as well as an indication of the direction American policy might take in 2023?  

Matt: [00:15:11] Sure. To start off, I think I'll give kind of some background on where American public opinion has been on China and where it seems to be going so. America's, amongst the public opinion on China has turned pretty negative over the past several years, especially going back to Donald Trump's election in 2016.

As many of our listeners probably know, American politics are very partisan. I mean, there is increasingly very little overlap kind of in the stances of the Democrats and the Republicans, but increasingly, one of the few areas of bipartisan kind of agreement is to be tough on China. As China has gotten more powerful, American politicians have grown concerned about its growing influence.

So Trump, as we might remember, instituted a sort of trade war with China that many were concerned about, and there was a lot of hope that when the Biden administration entered that it might sort of reset relations with China in a different direction than Trump's aggressive trade policies. But in fact, the Biden administration has kind of kept many of these restrictions and have actually implemented new ones that are in some ways more deeply impactful than, than those imposed by Trump.

So one thing that we've been watching closely here at Counterpoint are the addition of Chinese companies to the Bureau of Industry and Securities Entity list, many of which are technology companies. So essentially this entity list puts companies under a microscope and requires them to get certain permits from the Department of Commerce before they can do business with American firms. 

So in November we saw the addition of 35 more Chinese companies to this list, and that was just on the heels of a major wide spanning  a set of export controls on semiconductors, on and on semiconductor manufacturing equipment, especially targeting chips, 14 nanometres and more advanced, which are specially targeting China's ability to develop semiconductors going forward. 

In the short-term. We kind of believe that this set of export controls likely won't have too major of an effect. Chinese companies, because of the aggressive stance that the US has taken, likely stocked up on many of the chips that they required before these. Controls went into place. Companies like Nvidia are making specialized chips above 14 nanometres to meet needs. 

But in the long term, this is likely to have a major impact on China's development of a domestic semiconductor industry. So all of this kind of comes back to Washington's concern about Chinese economic and military development. It sees China as a major long-term competitor and is concerned about China's potential influence around the globe.

Now, if we look forward into 2023, I think a lot of these trends that we saw in 2022 are going to continue. So I think what we're going to see are more Chinese firms coming under kind of closer scrutiny by the Department of Commerce and its Bureau of Industry and Security. I think that we're going to potentially see tightening of the export controls that are already in place.

Or perhaps even new export controls. And I think that we're gonna see the Biden administration make a push in the coming year to get a lot of its allies on the same page and potentially instituting similar export controls. So as you can see, the Biden administration is really targeting technology as kind of, its key focus and its current policy stance towards China.

And I think that that's going to continue into 2023 and you know, even into the medium and longer term, I think technology is really gonna be at the center of relations between US and China. Now. I think that that captures a good, you know, amount of detail on the US side of things. But Archie, maybe we can pass it back to Yang.

Archie: [00:19:09] Thanks. Matt and thanks Yang. Yeah, this is a really important issue like China, US China technology race, and the US-China trade relationship heavy impact world economy. So in China that we definitely see some really encouraging signals on the US-China relationship. So back in November, the President, Xin, president Biden, they have, they might in Bali, they have a great talk.

And so the consensus here is that the both countries leaders have stand goodwill to warm the relationship, which has been worth point in the last decade. So President Xi has sort of a promised US President Biden that China is now going to replace the US status, the US President Bidens, that it is not encouraging any actions of changing the status quo of Taiwan Street and also the US is now sticking to decouple with China.

But what is see interesting is that the two countries leader, they agree that the two nation. Will compete. And this competition, as Matt have mentioned, will continue in the technology industry. And I think the semiconductor industry will be the area, the, the two countries will compete, the competition will get more intense.

So it is going to really interesting mix in the 2023. So on the one hand, and we can see the two nations they are trying to putting up for the relationship and in China, Sort of like listing is right lines in the US doing the same thing. The US I think it is making sure that they don't want any country to interfere with domestic affairs, including the US election.

And China is making, is making it very clear that the Taiwan issue is also China's micro affairs. It doesn't want to see any third country to interfere into death. A fire. So way. It is very promising to see that the two countries are making this kind of. So I think in the coming next couple of years, in my point of view, the military conflict should be avoidable.

The military conflicts will directly disrupt the supply chain will change everything. So that is the biggest risk factor and it is very encouraging to see that the two nations are treating efforts to avoid. And in military conflicts. So if we are, if we are going to talking about whether China will retaliate the US actions, like for example, like putting more Chinese companies on the, my answer is that.

Is this very hard for Chinese government to do anything like what the US has done? What China will do is uh, to continue, encourage the domestic self-innovation in technology industry, especially the semiconductor. It is like pretty simple probability game. So if you don't throw money at the innovation, you would got zero.

But if you, throw so much money won't guaranteed China to get any result. But the only thing that China can do is to put up more industrial policy to encourage the domestic economic conductor industry to grow. So this is why the China really strikes the technology and the education in the communicate of the twenties parties conquest.

And so technology and education will be the main task for China in the next five years.  

Matt: [00:22:30] Great. Thank you for that. Archie. In more recent days, what's dominated headlines are some of these dramatic scenes in China. Regarding Covid 19, our analysts ranked China's disorganized rollback of zero covid restrictions at number five in our survey of risks.

What might you be able to tell us about the covid situation in China, Archie, and how are things likely to develop in 2023? 

Archie: [00:22:54] Well, that is a really good question. Like China has been under sort of like covid restrictions for three years, and the things are got really messy, especially in the past year. So after the Shanghai lockdown, the Covid restriction just got more and more intense in many cities.

And just before the 20th Party Congress in October, we have seen many, many cities going into all sorts of lockdown. So to provide the spread of the army coronavirus. So I would say the recent policy change was very abrupt and very fast. It was like overnight, so after Chinese government announced to reopen the society and to live this covid, and also the people tested positive covid can stay at home.

And to recover by themselves. People just like get a little bit panicked. They just don't know what to do and people just go out and go to medicine, retail store to get basic favorite medicines. It was like to go into line to buy Advil in the Walgreens and those kind of, the medicine just went out of stock in at very.

So, I'm not kidding, like trans people cannot got fever medicines during the first week of the reopening. So Beijing was among the first batch of the cities to get fast very fast covid infections, and it was like first in and first out. And the traffic is getting more busier and busier day by day. and more, more people recovered and going out to eat at restaurants and the cities is gradually back to normal life.

But in China still, like many cities, they are experiencing the medical resources being stretched. So after Beijing, many, many cities are going, is experiencing the fast rise on the covid cases. The hospital are very, very busy and full of elder citizens. Like this is sort of like no avoidable because like China is kind of like home to 1.4 billion population, and the elder citizens population is very, very huge.

But the good thing is that the infection curve is very steep. And the whole reopening process is really like happening faster than our previous expectations. So previously we think that China may choose to, reopen a country in the spring of 2023, and the social order will be restored to normal, like something like in the mid or the end of the summer of the 2023, the whole process is happening so fast. So currently we think that China maybe restore the social order by the end of a Chinese New Year festival, which will be the end of the January or the early of the February. So that is to say we think the Q2 GDP growth might be higher than our previous estimates.

So when China is joining back to the world economy and having the normal social order, it very reasonable to think that the panda demand will be released then in the Q2 and in Q3 of the 2023. So we may have to expect that the Chinese tourist will go all over the. And to embrace runs and runs of the shopping spree in many countries like Japan and South Korea.

And the demand of the Chinese economy will, will, might be higher than people's previous forecast. So it's very reasonable to think like maybe the energy prices in next year we'll go up even higher because the Chinese economy is really like going to back into the life. So Yang. We've talked a lot about the US and Europe and China economy, but our analyst ranked emerging markets paying at a number three on our list.

So can you give us some perspective on the problems facing the emerging markets in the coming year? 

Yang: [00:26:49] It's easy to paint all of emerging markets with one brush, but we have to realize a lot of countries differ in many different ways. So I could give you examples where economies actually flourished in 2022 out of emerging markets, and that will be Middle East because of high energy prices and also reopening tourism and trade, and the GCC countries in Middle East actually did very well.

Currencies appreciated against the US dollar, and IMF actually recently hiked GDP forecasts for the region. And also, of course, we all saw the festivities in Qatar during the recent world Cup. But in the other countries emerging markets and most of countries in the world, actually the strong US dollar due to the Fed hikes has been and will continue to be a very significant headwind for emerging markets. 

So typically we see countries like India, Indonesia, Southeast Asia, Africa and Latin America. Currencies have depreciated 20, 30 or even more, 20-30% against the US dollar in the past couple months. Now this will, this causes huge strain on local economies.

For example, food and energy shortages are pretty common in a lot of. Countries because purchasing power of domestic currencies depreciate against the US dollar, and then they would have less to spend because food and energy accounts for so much of the, of their, regular spending. And when you aggregate these, some countries are struggling due to high debt levels.

So some countries pre covid were already running at pretty high debt to GDP ratios. And during covid, the fiscal situation deteriorated even further. And some countries are really in trouble and are going to World Bank and IMF. 

So in 2023, it really comes down to a division between good and bad fiscal management by different countries. So we do think there will be a recovery in places like Brazil in places like Middle East for sure, because energy prices will stay elevated and also in Southeast Asia. Southeast Asia really struggled during because they had a pretty bad covid wave and also currency depreciation against the US dollar. But Archie, as you mentioned, China's economy is, is expected to reopen and China actually.

Is the largest trading partner for most of the emerging markets in the world. So China coming back online, back to the international community, community and economy, running at a sense of normality will be a huge boost for a lot of emerging markets. So on that mark, I think there is some room for optimism.

Matt: [00:29:50] Thanks so much Archie and Young for joining me today for this discussion. 

Yang: [00:29:52] Thank you, Matt. It has been a pleasure. 

Matt: [00:29:55] We covered a lot of ground and there is a lot to think about for the coming year. To our listeners, thank you for tuning in. If you'd like to listen to more episodes of The Counterpoint Podcast, you can tune in on Spotify, Apple Podcasts, Google Podcasts, and other podcasting platforms.

Hope you have a great year in signing off.