It's prediction time for 2023
January 3, 2023
It’s officially a new year and while it’s just a day on the calendar, it’s an opportunity to start anew. 2022 will be remembered for its market volatility and economic challenges as public markets closed out with its worst loss since 2008. Hype cycle asset classes like crypto and collectibles crashed down to earth. With all that as the backdrop, what can we expect for 2023? Below are a few of my predictions that I think could play out this year.
The Fed will continue to incrementally raise rates through Q3 and will not provide any relief in 2023 - Inflation still needs to be tempered and the Fed has indicated they have every intention to fulfill part of its dual mandate to stabilize prices and push us to the brink of official recession in order to bring it in check and use rate cuts down the line as a way to revitalize the economy. In terms of impact to us, we can expect our APYs to continue to go up as investors demand higher returns with the risk free rate going higher and higher. This will put continued pressure on our borrowers to be able to generate margins out of their business.
The US will just barely avoid a major recession, the EU will struggle, and Asia will feel the effects of China’s errant COVID policy - In the US, GDP growth will still be there and will likely be better than the rest of the world. If the US does enter a major recession, the Fed will step in to lower rates in an attempt to temper the issue. Unlike the US though, the EU is going to struggle as a result of the impact of the war in Ukraine on energy prices especially during the winter. This will hurt consumer spending and industrial production and put a real drag on the economy. The colder this winter is, the worse it will get for the EU. China's botched re-opening will have a material impact on GDP in Q1 and the effects of the US CHIPS plan will put a dent on their ability to export at the pace China would like to. It will likely take until Q3/Q4 for Asia to recover in earnest but it will still be muted relative to other economies.
Consumer credit will significantly underperform - Savings rates for consumers are on a continued decline and actual savings are being depleted rapidly in an inflationary environment. Paired with an environment of rising unemployment and credit usage at some of their highest ever, there's most assuredly going to be a deterioration in consumer creditworthiness.
Crypto will remain depressed for the entirety of the year - This is an asset class that has been beaten down heavily as a result of rampant speculation and outright fraud. It was the primary beneficiary of the free money environment of the past 24 months and now that it's effectively come to a close, there is very little interest in hyper-speculative assets. Flagship crypto assets like Bitcoin and Ethereum will trade sideways to lower for the majority of the year and other altcoins will either continue their precipitous decline or die off altogether.
With late stage venture market valuations plummeting in 2022 and IPO markets continuing to remain soft, consolidation and capitulation is inevitable - Companies that have historically raised too much money without living up to their valuations before becoming cash starved are left with little option. Their ability to grow their way out is muted given the overall macro environment, their ability to raise cash in private markets at even down round valuations is challenging given much of the “dry powder” is at the whims of skittish LPs, and their preferred route to go public is largely still off the table until public markets recover. Given this, many of these larger later stage companies will have no choice but to put themselves up for sale and go to the highest bidder - whether it’s another well funded / profitable venture backed company on one end or a large bellwether public corporate on the other end. Everyone knows these companies are stressed and are actively shopping if they are in a privileged enough position to do so.
Venture market valuations will not stabilize until the tail end of Q3 - VCs can hold on for longer than startups will need their money. LPs of these VC funds will be looking to them to make smarter, more calculated bets and mistakes will not be viewed favorably by any LP in this environment. If public equity markets remain volatile as expected, valuations will continue to come down, especially for late stage startups. This will be in lockstep with Fed policy as relief on the valuation side will only come when rate cuts are projected to come back. Back in 2000, valuations overcorrected and were trading at cash, it's not unrealistic to expect that again this time around before things return back to normal.
AI will be the only industry that gets a favorable multiple - Within the startup ecosystem, AI will be the lone bright spot but that is more a byproduct of uncertainty around how to fairly price the companies who sit on top of open source software vs. actually delivering anything of real value. I expect Q1 and Q2 to be peak AI hype before it begins to behave more like other sectors. The most depressed sectors will be ones facing consumers as the impact of consumer spending will be hit fairly hard. Fintech will be neutral to negative given they were the primary beneficiaries of the free money market, with neutral being ones that are more immune to consumer pullback and the negative ones being things like neobanks, lenders, and others where competition is stiff and product differentiation is low. The most positive sectors, outside of AI, could be healthcare and energy as those are top of mind given the backdrop of global uncertainty at the moment.
A new year brings new opportunities, even despite the market conditions. Each year in this company's life can be defined by a theme and 2023 is going to be the year we complete the transition into a real software company. I can promise you the market will reward us for it. Let's get to work
