Investment outlook 2023: the year things stop getting worse?

Having ‘eased’ our way through much of the past decade and beyond, 2022 was the year we started tightening our belts – in more ways than one.

Normally, central banks would raise interest rates when growth is high and the economy over-heating. However, covid bail outs and supply chain disruptions, added to years of quantitative easing, resulted in an inflation surge that had not been predicted. Its persistence and stickiness led to central banks finally raising interest rates but at a pace and level many had thought impossible. Both equities and bonds fell substantially, leaving investors with nowhere left to hide.

This has left investors in a totally different environment to the one they have been in for the past decade or so.

Where do we stand today?

Inflation remains stubbornly high in the UK, Europe and the US, but because interest rates have risen most aggressively in the US, the impact on inflation is likely to be faster. The consensus is that the US central bank will have the opportunity to at least stop raising rates, if not lowering them, in the first half of 2023.

While things may not be as rosy in the UK, a better outlook for the US will boy global investors.

Where are the best opportunities in 2023?

The Chelsea research team has not been a fan of bonds for many years, but they are looking very interesting today. For the first time in more than a decade, both government and corporate bond yields are at a decent level and well above cash.

The outlook is less clear for equites. Markets are cheaper – some distressed - but they could get cheaper as we head into recession.

But when you have inflation in the system, history tells us that that it can be a good time for equity income. Not only do you have a dividend that you can compound over time, but also the potential for capital growth as markets recover.

If you think inflation will go back to 2-3% and rates will follow, it’s also probably time to rethink the quality growth stocks too. These compounders have pricing power and tend to do well in recessions.

Finally, of all the areas of the market that have been beaten up in recent months, UK smaller companies look the most attractive to us. They could fall further but they are giving quite a bit of valuation support at this level.

Chelsea Selection funds to consider in each area:

Bonds

  • Artemis Corporate Bond
  • Nomura Global Dynamic Bond
  • TwentyFour Dynamic Bond

Equity income

  • TB Evenlode Income 
  • Schroder Asian Income 
  • M&G Global Dividend 

Quality growth

  • LF Montanaro UK Income 
  • CT European Select 
  • Rathbone Global Opportunities 

UK Smaller Companies

  • Liontrust UK Micro Cap 
  • IFSL Marlborough UK Micro Cap Growth 
  • TB Amati UK Listed Smaller Companies 

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.

Published on 14/12/2022