Investing trends to watch out for in 2023: what analysts say

Investors have had to get used to a period of sustained high inflation in 2022. The challenge has been how to grow your money in real terms while inflation reached 10.7% in November – a fall from October but still close to its highest level in 40 years.

“Uncertainty reigns,” says Bryn Jones, manager of the Rathbone Ethical Bond & Rathbone Strategic Bond funds. “With inflation stubbornly high in the UK and US and unemployment still very low, the prospect of more central bank hikes into more restrictive territory will continue to throw buckets of volatility into markets, some of it cold water.”

Meanwhile, the cost of living crisis is on everyone’s mind. People have noticed for some time now that the rise in food and travel costs are not just a few pence here and there, it’s significant amounts of money. Even higher energy bills are on the way in 2023.

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Despite its prediction that GDP will fall by 2% next year, Capital Economics is optimistic. “Our view that inflation and interest rates will be a bit higher than most forecasters expect in 2023 (interest rates to a peak of 4.50% in early 2023) explains why we think the recession will be deeper. The good news is that we think the recession will end in the second half of 2023 and a gradual fall in inflation will probably allow the Bank of England to inject more vigour into the recovery by cutting interest rates in 2024,” explains chief UK economist Paul Dales.

While making predictions is always difficult, we’ve asked analysts their thoughts on investing trends in 2023.

1. The return of bonds as an attractive asset class

Yields on offer from fixed-income bonds are at multi-year highs and, as such, the risk/reward in this asset class looks appealing.

David Coombs and Will McIntosh-Whyte, managers of the Rathbone Greenbank Multi-Asset Portfolios, explain: “Higher bond yields in 2022 have provided an attractive entry point for both government bonds – which should return to their role as a traditional risk off asset – and corporate bonds where one is now being paid sufficiently for both default and liquidity risk.”

Noelle Cazalis, manager of the Rathbone High Quality Bond Fund, also thinks bonds are interesting for 2023.

“The income investors can draw looks attractive, something that was missing for a few years. Bonds issued from banks look particularly attractive as earnings and solvency have been robust. However, there are sectors where the outlook looks more challenging, such as real estate companies that continue to suffer from Covid changes and face higher refinancing costs.”

2. Sustainable infrastructure

At the time of writing, four of the top five best-performing sectors in the UK market in 2022 have been oil, tobacco, mining and defence – this preference for “sin stocks” may reflect investors’ need to chase safer returns.

Yet Richard Hunter, head of markets at interactive investor, doesn’t think ESG investing has taken a back seat. “It’s noticeable that companies are devoting more time to their environmental credentials when reporting, a theme which will now become entrenched.”

David Harrison, manager of the Rathbone Greenbank Global Sustainability Fund, believes that events in 2022 have accelerated the move to more sustainable infrastructure. “Renewable sources of power continue to represent a significant investment opportunity, coupled with the growing need for energy storage solutions and requirement to invest in next generation grid infrastructure. Similarly, we see increased focus on investment in ageing water infrastructure particularly in the US and Europe, which is likely to remain steady even in a weaker global economy.”

Transport is one to watch, explains Harrison. “As supply chains start showing signs of improvements next year, it could prove beneficial for companies exposed to electrification of the global transport fleet – an attractive area of investment to us.”

3. UK stocks

It’s worth looking close to home for investing opportunities in 2023 – the UK stock market has outperformed most of its global peers in 2022 and remains cheap.

Lee Wild, head of equity strategy at interactive investor, explains: “The FTSE 100 has had a much better year than most of its international peers where stocks trade down over 20% in some cases. An abundance of defensive sectors like oil, defence and tobacco has helped performance, and the index has spent much of 2022 trading between 7,000 and 7,600, a few hundred points either side of where it ended 2021.”

There’s real value to be had thanks partly to UK resilience, according to Alan Dobbie and Carl Stick, co-managers of the Rathbone Income Fund. “The best UK businesses are managing to deal with supply chain issues, rising costs, and labour challenges, as evidenced by the latest round of corporate results. The UK market is rarely this cheap, and cyclical businesses – notwithstanding economic challenges – are also good value versus defensives.”

Their picks? “We have been looking to selectively buy into both growth (tend to be niche ideas like Games Workshop, Experian, Dechra Pharmaceuticals, not just broad-brush approach to industry sectors) and cyclicality (cherry picking key industrials like Vesuvius and IMI),” explains Dobbie.

4. Companies that are in good shape and have not over-borrowed

As ever, it’s hard to predict the extent to which the economic outlook and people’s diminished spending power might affect companies and markets, but focusing on companies with good finances that supply the everyday staples that we all tend to consume might be the safer option.

“We remain focused on quality businesses with resilient earnings, and companies that are likely to survive a recession and even come out on the other side gaining market share from weaker competitors,” explain David Coombs and Will McIntosh-Whyte, fund managers of the Rathbone Multi-Asset Portfolios.

Companies that enjoy strong competitive positioning are essential for David Harrison, manager of the Rathbone Greenbank Global Sustainability Fund. “To me, that means good pricing power, robust cashflow generation and management teams that are allocating capital in a sensible and clear way.”

What investors need to do in 2023

1. Review your goals

Check your portfolio reflects what you are trying to achieve and what actions, if any, could help achieve those goals. Could you be paying less in fees? Are you thinking about ditching holdings in fossil fuels?

2. Stay cool if your investing horizon is more than five years

Remember the golden rule to not panic and sell your investments. There’s a good chance that any falls next year will just be a blip in your portfolio’s history.

3. Diversify, diversify, diversify

We know the golden rule about considering a mix of funds, shares and asset classes in order to spread your risk. You might prefer a multi-asset fund that does the diversification for you.

4. Look at incorporating some “capital preservation”

Less high-flying assets such as gold, government bonds and absolute return funds are worth considering because they are good at “capital preservation”.

Gold is seen as a steady Eddie that usually holds its value or increases when other investments fall. Absolute return funds use techniques including short selling, derivatives and leverage in the hope that they will deliver positive returns under any market conditions.