13 Feb 2023 4 min read

Grey swans for 2023 – Are you prepared?

By Christopher Teschmacher , Greta Farina

It's time to discuss those unlikely, but still possible events that can have an outsized impact on markets and portfolios.


Unlike ‘black swans’, which are truly unforeseeable events and therefore difficult to hedge against, ‘grey swans’ are risks that are possible to take account of in portfolio preparation. They offer signals that can either be interpreted and acted upon, or simply accepted as rewarded risks.

We take seriously the exercise of analysing these risks – both past and present – as doing so can be powerful in challenging conventional wisdom and undermining previously held assumptions.

2022 – A truly eventful year

Last year was quite extraordinary – a year for grey swans if ever there was one! We witnessed aggressive rate hikes, a long-lasting war in Europe, China’s continued lockdowns, an energy crisis, inflation so high as to provoke a cost-of-living crisis, and three prime ministers and four chancellors in the UK.  

We flagged twenty possible risks for 2022, and nine of them happened in some form. These were: a reduction in Covid vaccinations, Boris Johnson leaving office, Russia’s invasion of Ukraine, EUR/USD trading at parity, two consecutive quarters of negative US growth, the collapse of cryptocurrencies’ total market cap to under $1bn, and the spread of a new Covid variant.

However, the impact of ‘Trussonomics’ was beyond most investors’ expectations.The definition of a market-moving event, the unfunded fiscal expansion – which included the biggest tax cut in 50 years – caused a big reaction in the markets, with sterling falling to record lows and government borrowing costs spiking.

Yet the standout event of the year was the Russian invasion of Ukraine. The diplomatic response from western economies, including sanctions on Russian energy exports, led to a dramatic energy supply shock. This particularly weighed on Europe, which historically has depended on Russian gas, and caused already increasing inflation rates to spike, contributing to a serious cost-of-living crisis across the region.

The US was not immune to this shock and also suffered growing pains as the post-Covid boom was hit by supply-side constraints. Indeed, central banks globally engaged in historically aggressive rate hikes as a result, in a bid to prevent inflation becoming entrenched. This caught out bond markets complacent on a prolonged period of low or zero rates.

The combination of 2022’s dramatic events translated into negative real performance across all major asset classes apart from commodities, with a positive correlation between bonds and equities not seen for decades.

2023 – A dystopian year?

This year's grey swans have a more dystopian feel than in previous years. Cyber attacks have become increasingly common and can result in the exposure of sensitive information. If they become more frequent, it's not hard to imagine the effects spilling over into the financial and real economies.

Another risk we've identified is damage to vital undersea internet cables. This could cause major financial institutions like exchanges to shut down temporarily, forcing a need to find alternative sources of internet access.

The evolution of Russia's position remains in the spotlight. At the most positive end, a peace deal accompanied by the remote possibility of Nord Stream 2 becoming operational could trigger improvements to inflation and growth. On the other hand, the involvement of NATO in the Ukraine-Russia conflict cannot be excluded.

There’s also the possibility of greater tensions between China and Taiwan, with the tail-risk of a conflict.

Our focus now is to research these grey swans and their potential portfolio impact, as well as consider possible risk mitigation strategies.

Here are eight more grey swans we’re floating for 2023:

  1. Stagflation (CPI > 5%, unemployment > 5%) in the US in at least one quarter
  2. Nationwide UK house prices fall by more than 15% peak to trough
  3. There are more than 500 IPOs, representing a return towards peak levels
  4. Brent crude oil reaches $200 per barrel
  5. North Korea enters armed conflict with South Korea/Japan
  6. One or more countries start the process to leave the EU
  7. At least one tech company is fined under GDPR
  8. At least one European country faces government-forced food rationing

So while it’s always impossible of course to predict exactly what’s going to happen, the key question remains as relevant as ever: are you prepared?

Christopher Teschmacher

Fund Manager

Chris is something of a perfectionist which may explain the raft of automated spreadsheets ensuring charts are properly formatted to Teschmacher® standards. Having become the resident quiz master, he keeps his colleagues on their toes with a steady stream of investment trivia. This worldly Dutchman has wanderlust in his blood – he was born in Australia and has lived in London, New York and Paris. He has since settled in London with his young family, although regular trips to the South of France suggest that ambitions to become a vineyard owner are still strong.

Christopher Teschmacher

Greta Farina

Graduate Analyst, Active Strategies

Greta joined LGIM's graduate programme in 2022 and is currently working with the Global Research and Engagement Group in Active Strategies focusing on ESG. Prior to this rotation, she was working in the Multi-Asset team focusing on top-down strategies. She recently graduated from King's College London with a BSc in Philosophy, Politics and Economics. As a proud Italian, she enjoys inviting friends over for dinner and being surprised every time she fails to make a basic bruschetta or risotto recipe.

Greta Farina