‘Gentle innovators and cashflow generators’
Alexandra Jackson, manager, Rathbone UK Opportunities Fund
We believe UK equities will outperform the US this year. The starting points of the two indices could not be more different: the S&P 500 starts on 18x questionable looking earnings, while the FTSE All-Share is still below 11x. If investors worry about downgrades, a market that is already pricing in a deal of distress looks sensible. Moreover, there are hopes that the worst of the cost-of-living crisis is now in the rear-view mirror.
With sentiment and valuations this low, even small improvements can make a huge difference. We wouldn’t buy ‘old-economy’ businesses again – they performed well last year but those same forces, eg energy companies, are not in place this time. We like gentle innovators, market leaders and cashflow generators.
‘Energy transition will remain on track’
Siobhan Funge, senior vice-president, KBI Global Investors
There’s value to be had in energy transition, even with a slowing global economy. We believe the energy transition will remain on track despite slower growth in 2023, and that companies offering solutions to the energy crisis will benefit from higher demand and offer earnings resilience.
Legislation such as the Inflation Reduction Act should kick-start investment spend in new wind and solar installations, while markets such as battery storage and electric vehicle charging infrastructure should enjoy strong growth off a low base. Areas such as the decarbonisation of electricity supplies, smart building technologies, smart grid infrastructure, energy storage and disruptive technologies are secular growth areas and offer value for active specialist investors, even in a slowing economic environment.
‘Portfolio construction practices must evolve’
Ursula Marchioni, head of portfolio consulting business, Emea, BlackRock
We see mild recessions in the US and Europe as the lagged effect of rate hikes meet other drags – depletion of consumers’ pandemic savings in the US and the energy shock in Europe – and a stickier inflation challenges central banks’ ability to tighten without crushing growth.
Macro factors – rates and inflation – will be primary drivers of portfolio outcomes in this new environment, with much greater impact than in decades past. Multi-asset investors will need to frequently re-assess their asset allocation choices, adapting them more nimbly than before. Portfolio construction practices will need to evolve, not only to reflect elevated macro uncertainty but deliver resilient outcomes across multiple, including extreme, market scenarios.
‘Investing in tech solutions will be key’
Alison Porter, portfolio manager, Janus Henderson Investors
While we anticipate some further near-term cuts in earnings expectations, we believe the sharpest cuts for the technology sector are already behind us. The significant job cuts witnessed across the sector over the past six months reflect a renewed focus on cost discipline and shareholder returns, which we believe will drive stronger profitability longer term as the economic environment stabilises.
We view technology as the science of solving problems and investing in solutions is going to be a key driver, particularly for sustainable technologies. We are excited by how long-term secular trends are converging within the sector – from digital transformation and the emergence of a consumer and industrial metaverse to the electrification of our economy, the coming of artificial intelligence and the subsequent need for next-generation infrastructure.
‘Regulation on ESG will continue to evolve’
Stephanie Kelly, head of thematic sustainability, Redwheel
Many investors will have to balance multiple and differing definitions of sustainability. The regulatory and legal environment for ESG in the EU, UK and the US will continue to evolve in 2023. This will have implications for: fund names, where a ‘responsible’ fund in the EU may not meet the upcoming UK requirements; restrictions in key markets such as the US, where ESG is increasingly a polarised issue leading to state-by-state differences in ESG requirements/allowances; and crucially, investment decision making to match fund labels with the bar for what ‘sustainable’ is.
A key one to watch is the response from the EU regulator on what qualifies as ‘sustainable investment’, which should have profound effects for asset managers and owners.
‘Net-zero push drives investment in industry’
Katerina Kosmopoulou, partner, J Stern & Co
We expect industrial companies tied to the themes of aerospace and defence, automation and the transition to net zero to continue to do well in 2023, building on the performance of the last year.
Geopolitical tensions, the need to modernise civil infrastructure – and to make it more green and resilient – the push to a net-zero economy, to reshore critical industries and to substitute scarce labour are all accelerating investment spend across the industrial spectrum. Names like Eaton, Amphenol and Xylem are all direct beneficiaries of this trend, reflected in strong operating momentum and all-time backlogs.
‘Opportune timing for gold exposure’
Alison Savas, director of investments, Antipodes Partners
Gold has faced two major headwinds. First, the strength of the US dollar and, second, the rising real yields in the US. We get paid nothing to hold gold, so if real interest rates rise – that is the risk-free return above inflation – the opportunity of cost of holding gold goes up.
The dollar and real yields are likely to subside this year, driven by rising geopolitical tensions and an increasing probability of a Fed pivot as inflationary pressures subside. Therefore, the timing for gold exposure is opportune in both a soft and hard landing.
‘Inflation could remain higher for longer’
Matilda Davison, trainee investment manager, Kingswood
Inflation may not fall as much as expected. The Bank of England has stated it expects inflation to fall to around 4% by the end of the year, from the current 10.1%, which means interest rates could plateau or even fall back slightly.
However, in recent weeks there has been speculation from investors that central banks may pull back from their plan of reducing interest rates. Core inflation, which excludes energy and food, has continued to expand. This, coupled with a tight labour market, with wages and salaries on a growth trajectory year on year with no sign of stopping, leads to higher prices for products and services, which likely will mean that inflation remains elevated for longer than currently expected.
‘Vital need to overcome energy insecurity’
Cordelia Tahany, ESG and investment analyst, Unicorn Asset Management
Recent shifts in political sentiment and the macroeconomic climate have shown us, now more than ever, the global need to overcome energy insecurity and find a longer-lasting energy source that’s impervious to seasonal imbalances. The UK is well positioned to capitalise on industry developments, historically having been at the forefront of nuclear energy with many UK firms remaining market leaders within the sector.
Nuclear power expansion remains a crucial element of the energy transition, with the Intergovernmental Panel on Climate estimating an annual investment of $125bn (£103.4bn) will be needed annually over the next decade to meet our transition targets.
‘EM fintechs have their chance to shine’
Sara Moreno, portfolio manager, PGIM Jennison Emerging Markets Equity Fund
We expect emerging market (EM) fintech to grow rapidly in the years ahead. As well as benefits of great speed, convenience and lower costs, fintechs in many EM countries benefit from competing with incumbent banks that have often invested less in new technology applications and cost more than their developed market rivals. Several EMs – especially Indonesia, India and Brazil – are at an early stage of fintech development and have large underserved and unbanked populations, as well as small and medium-sized enterprises that can benefit substantially from improved access to financial services.
Each country is developing its fintech industry according to its needs and within its regulatory framework. In markets such as Brazil and Indonesia, regulators have lowered the barriers to entry, thus encouraging tech companies to acquire bank licences and offer fintech services.
‘Least successful biotechs will drop out of index’
Ailsa Craig, joint lead investment manager, International Biotechnology Trust
Many of the biotech companies that floated during the hype of 2021 at unjustifiably high valuations have since struggled to stay afloat. We expect to see the least successful of these drop out of the index over the coming year.
Mergers and acquisitions should continue in the sector, as large, cash-rich biotech and pharma players look to put money to work. These transactions seem to be favouring the relatively de-risked companies with a shorter timeframe to profitability.
‘Healthcare is the sector to watch’
Baylee Wakefield, multi-asset portfolio manager, Aviva Investors
Of the defensive sectors, we believe healthcare will outperform due to supportive demographic trends and innovation. There are several areas of innovation within healthcare: better diagnostics and earlier disease detection, better drug modality platforms and tools.
Covid-19 highlighted the shortcomings of the traditional framework for pharma research and development (R&D), and increased focus and collaboration has led to pivotal clinical trial success rates climbing considerably higher. The combination of a rise in peak sales, the reduced cost of development and reduced cycle length indicate that pharma is benefiting from optimising R&D processes. We expect healthcare to perform well across multiple regions, driven by clinical catalysts in Europe and by commercial execution in the US.
‘Macroeconomic outlook remains uncertain’
Kirsteen Morrison, co-portfolio manager, Impax Global Opportunities
There is an unusual level of uncertainty about the macroeconomic outlook in 2023. Markets have recovered from their lows, having discounted a pivot in interest rates as evidence of a slowdown emerged and the rate of increase in inflation peaked. However, the central banks remain vocal that they will break inflationary expectations.
Consequently, volatility is likely to persist until the fight against inflation is over. Impax continues to favour quality companies aligned to the transition to a more sustainable economy. Quality companies are likely to produce more predictable earnings. Meanwhile, companies whose products and services address these structural issues are likely to grow at a faster rate than the broader economy.
‘ESG credentials gain competitive advantage’
Sally Clifton, responsible investing manager, Chelverton Asset Management
Last year was a potential inflection point for ESG as the tailwinds driving company investment in ESG management capabilities clashed with headwinds exacerbated by the Ukraine war. Many predict economic pressures in 2023 will delay important ESG management commitments, noting BP’s recently
revised decarbonisation plans.
However, we predict a company’s ESG management capabilities will continue to rise in importance as a management quality indicator for investors. Goods and services produced with superior efficiency and reliability will, as ever, gain the most competitive advantage, ensuring attention remains focused on superior resource efficiency and talent management.
International Women’s Day 2023 highlights the business case for diversity, equity and inclusion and the levers companies should pull to attract and retain this talent.
This article first appeared in the March edition of Portfolio Adviser Magazine
