15 December 2022 #5. Never Give Up. Emerging markets will face very different challenges and headwinds in the coming months. Political risk has been rising in Latin America, Eastern European countries are being hit harder than most by the energy crisis, and commodity importers throughout the world will have to cope with a strong dollar, high energy and food prices. Credible policy moves will make the difference. Debt sustainability concerns are increasing for some countries in a context of increasing rates and capital flight to safety. #6. Castle on the Hill. Central bankers are determined to fight inflation and make sure that it does not become entrenched. While the current hiking path is about to moderate, central banks’ independence will be tested either way: if erring on the side of keeping their monetary stance more restrictive for longer despite a looming recession, or if throwing in the towel to early and risking stagflation for good. Against the background of moderate quantitative tightening and decreasing system-wide liquidity, there is a risk of squeeze from a policy mistake. #7. Bad Habits. Since 2020, the war against the virus, and now against Russia have one super weapon: fiscal spending. It will remain at the center stage over the next couple of years, from relief measures to the cost of living crisis, to green industrial policies to help with silent wars (climate change, ageing), to fighting the urge to a massive tax policy U-turn. More targeting for aid, and fewer distortions are welcome to avoid that financial markets become very selective. #8. Easy on Me. In 2022, capital markets experienced an unmitigated disaster with an unprecedented price correction in both equities and fixed income. Going forward, earnings forecasts still seem too benign, and even a milder recession is not fully priced in. Fixed income is back but mind the risk. Also, as central banks drain excess system-wide liquidity and trading volumes even in historically liquid markets decline, financial accidents needs to be watched out for. 3