As we approach the end of 2022, investors’ thoughts naturally start looking back to the year that was and ahead to what 2023 might hold in store.
With inflation – particularly in energy prices – having been the focus for much of the year, it is perhaps unsurprising that the best-performing funds in both the open- and closed-ended universes have been in the commodities and natural resources sectors.
Specifically, energy-focused resources funds have performed better than those concentrating on metals and mining, with the top-performing (open-ended) Blackrock World Energy fund returning 52.9% while its stablemate Blackrock World Mining gained 19.4%.
Analysis by Bestinvest shows the MSCI global energy index rose by 43% in local currency terms and by 58% for sterling-based investors year-to-12 December, while the materials index fell by 7.9% and rose by 1.8% respectively in local currency and sterling. The return on the IA Commodities & Natural Resources sector (which includes both energy and materials) was 13%, while figures from the AIC show the share price total return on the comparable closed-ended Commodities & Natural Resources sector was 28%.
At the other end of the spectrum, IA sectors focused on technology, UK smaller companies and index-linked gilts all declined by more than 25%. While the first two illustrate a shift away from more speculative or growth-orientated investments in expectation of a global recession, the underperformance of index-linked versus conventional gilts looks counterintuitive at first glance in a time of historically high inflation, but is based on the logic that such bonds may be overpriced given the same recession fears mean inflation and interest rates are likely to moderate (an assumption perhaps backed up by the lower CPI figure for November).
Given a tumultuous year of three prime ministers, eight Bank of England base rate rises, persistent double-digit inflation and lingering Brexit malaise, UK large-cap companies have performed remarkably solidly, with the FTSE 100 index marginally up (by a little over 1%) year-to-date, having recovered by around 12% since September’s mini-Budget.
A survey of private investors by the platform Interactive Investor reveals that around 85% of users expect the index to be above 7000 points (compared with a current level of circa 7500) at the end of next year, pointing to a maximum loss of 7%, with more than half expecting an increase from today’s value. Performance for the large-cap index has been buoyed by the energy sector (where even windfall taxes have so far failed to dent record levels of quarterly profits), underscoring the international nature of these companies’ revenues (and accounting currencies), which benefit from continued US dollar strength.
So what lies ahead? Contrarians may wish to consider those sectors that have underperformed this year, although in the case of UK smaller companies, expectations of a tougher domestic economic situation could weigh on prospects, particularly for those businesses exposed (directly or indirectly) to consumer spending. Bestinvest tips emerging markets as a ‘wildcard’ for 2023, pointing to the potential benefits of a relaxation in China’s zero-Covid policy, although it cautions that risks remain elevated. Only 8% of Interactive Investor users surveyed said they were most likely to increase their allocation to emerging markets, with another 7% backing Asia, compared with 50% for the UK and 20% choosing the US.
Bestinvest’s final defensive suggestion is an allocation to physical gold (available via funds and ETFs as well as in its natural form). Gold is widely seen as an inflation hedge, and expectations of a weaker US dollar may make it more attractive for investors based in other currencies. However, it must be noted that for all its shiny attractions, gold is notably an income-free asset, which may be a consideration in a rising interest rate environment where other defensive assets can offer a yield as well as the potential for capital preservation.