What lies ahead: Time to keep calm and carry on?

M&A, China, bonds and green investments are some of the areas touched on by industry experts in February

Person sitting quietly on the edge of a dock watching the sunset


‘Recovery is finally coming into view’

Garry White, chief investment commentator, Charles Stanley

Garry White, chief investment commentator, Charles StanleyM&A activity will pick up significantly as international buyers go bargain hunting for UK-listed businesses. Markets and company directors look ahead and make decisions on what the future holds.

This means 2023 should be the year when investors and businesses move on from managing downturns to planning for the likely recovery. Britain’s depressed share prices and stubbornly weak pound means quality companies are trading at bargain prices. With a recovery eyed, they will become more attractive.

In 2022, the value of inbound M&A for British companies declined to its lowest in four years. The combination of low equity valuations and subdued sterling should offset international buyer concerns as a recovery comes closer into view and reverses the trend in 2023.

‘Deal selectivity will be key in this environment’

Kirsten Bode, co-head of private markets, Muzinich & Co

While the macroeconomic growth outlook remains uncertain, the demand for private debt – from both an investor and borrower perspective – is likely to continue. As public market valuations recover, renewed flows into the asset class are likely.

Higher yields and a lack of mark-to-market volatility should again prove compelling for investors seeking portfolio diversification.

As we move into a new year and a potential recessionary environment, we see opportunities in companies in more defensive sectors as well as in those deemed more resilient to cyclical trends.

However, across all regions, deal selectivity, structural and covenant protections, and prior experience in handling complexity, will increasingly become key in navigating such an environment.

‘China will outperform US for first time in years’

Tom Hopkins, portfolio manager, BRI Wealth Management

Our 2023 prediction is that China will outperform the US for the first time in years. Evidently the big overhanging cloud for China since 2020 has been its government’s handling of the Covid-19 pandemic.

The slow progress of a domestic vaccine coupled with the unpredictability of lockdowns, as well as other issues, has steered investor sentiment away from the region.

With Covid policies being abandoned in late December and the country reprioritising economic growth, we believe this gives China the runway to superior economic growth against its western peers for 2023.

‘Expect a better year for balanced portfolios’

Guillaume Paillat, multi-asset fund manager, Aviva Investors

Despite widespread pessimism, the gradual easing of inflation pressures in 2023 should spare global central banks from having to force economies into deep recessions. Relieved pressure on bond yields should see the return to a more usual negative equity/bond correlation driven by the economic cycle.

More stable bond yields will halt the multiple compression which was the hallmark of equity markets in 2022. Non-US regions have more scope for valuation re-rating this year.

On the flip side, lower inflation will reduce corporate pricing power and earnings in the first part of the year, and this is still not fully discounted in markets.

However, markets are forward-looking, so expect a better year overall for a typical balanced portfolio.

‘EM debt provides market momentum’

Jason Simpson, senior fixed-income strategist, SPDR

Headwinds are becoming tailwinds for emerging market (EM) debt. EM debt offers a high yield and the potential for performance as the central bank cycle turns. A further softening of the US dollar and the rebuilding of EM debt holdings could provide additional momentum.

US dollar strength weighed on EM debt during 2022 – but that trend reversed in Q4 2022, and we expect the US dollar to weaken further. In addition, sentiment among EM central banks has turned less hawkish – more so than for their developed market counterparts.

‘Green investments are attractive macro play’

Scott Levy, CEO, Bedford Row Capital

Scott Levy, CEO, OrestesAs interest rate volatility continues to decline, investors will look for relatively shorter-tenor inflation or index-linked bonds rather than fixed, even in the emerging markets as the risk of inflation is less than emerging market risk.

This means there will be more potential choice for yield-hungry investors. In addition, green opportunities will offer attractive returns, particularly where there are compelling macro reasons to invest, such as opportunities around hydrogen – as the main EU-supported energy transition play –
and battery storage. Why create renewable energy if you cannot use it when you want it?

‘Portfolios will look very different in 2023’

Paul Surguy, managing director, head of investment management, Kingswood

When thinking about predictions for the year, it is hard to not be swayed by what happened last year, or indeed what has happened in 2023 so far. What we can say with certainty is that 2023 will be markedly different from 2022.

Many investors will never have seen interest rates as high as they are today, let alone where they will be by the end of the year. This will mean portfolios should look substantially different to how they did at the beginning of 2022.

This leads us to our sole prediction that on average, well-diversified portfolios will give better risk-adjusted returns than their single-strategy cousins.

‘Deglobalisation trend continues apace’

Graeme Bencke, fund manager, Amati Strategic Innovation Fund

The tectonic plates of global trade are shifting, with the hardening of the US stance against China in the semiconductor space being a clear example. However, this is just part of a much wider de-globalisation trend, which will focus more spending on regional and national supply chains.

The significant US investment coming from the Bipartisan Infrastructure Law and the Inflation Reduction Act are pieces in this puzzle, and we expect continued infrastructure spending in areas such as telecoms and energy.

Governments can time this spending to counter the cyclical weakness of a likely consumer recession – and investors can use this trend to their advantage.

‘European small caps will return to favour’

Dale Robertson, co-manager, Chelverton European Select Fund

Overarchingly unfavourable sentiment towards Europe has contributed to a bifurcation between the larger stocks in the index – mainly high-quality growth companies including ASML, L’Oréal and LVMH, which have never been truly out-of-favour due in part to globalisation and low interest rates – and a long tail of small caps trailing in their wake.

Select companies in this tail can give outsized but well-diversified exposure to the mega-trends of energy transition and digitalisation, while delivering value and growth to a portfolio. With recent signs that

Europe is returning to some level of favour, European small caps look poised to resume their long-term outperformance.

‘Think decarbonisation, food and biodiversity’

Sarah Bratton Hughes, head of ESG and sustainable investing, American Century Investments

Decarbonisation will remain a hot topic, but themes such as food and biodiversity will also gain traction. We believe the intersection of the two will gain momentum.

It became clear to investors in 2022 that as over half (55%) of the world’s gross domestic product – $41.7trn (£33.9trn) – depends on healthy biodiversity and thriving ecosystems, biodiversity risks and opportunities should be considered when assessing environmental impact and innovation opportunities
in a portfolio.

Combine that with a global food crisis and the knowledge that agriculture and food production harm the environment by depleting natural resources and contributing to greenhouse gas emissions.

Investors will have to balance the short-term need to feed people against the long-term goals of decarbonising and restoring healthy, sustainable ecosystems.

‘Expect equity-like return from fixed income’

Jeremy Cunningham, investment director, Capital Group

The repricing in the fixed income market today has been driven more by rates than credit spread, meaning you have a repricing for the entire fixed-income sector.

Over the long term, starting yields are simply the proxy for future total returns. Therefore, if you now begin with yields at 8-9% for the higher-yielding bonds, you could expect equity like returns with lower volatility from investing in fixed income.

This is something we have not seen for a while and could certainly be positive for 2023. Moreover, a lot of investors were disappointed in the positive correlation between equity and fixed-income markets in 2022, but in 2023 we will probably see that differentiation again, as bonds would finally provide protection through their higher yields against equity market volatility.

‘Look for new leaders’

Felix Wintle, manager, VT Tyndall North America Fund

My prediction for 2023 is that the mega-cap growth stocks continue their underperformance versus the S&P 500. These stocks – Meta, Amazon, Alphabet, Microsoft, Apple, Netflix, Tesla – have not been good performers over the past 12 months, and I believe that as growth continues to slow, they will not be the source of performance they have been for the past decade or so.

Some investors claim these stocks are now cheap because they have fallen in price, but I would caution investors to consider how sure they are in their predictions for earnings. If those earnings estimates are too high, these stocks could be a lot more expensive than they seem.

This is a time to look for new leaders and winners of the next cycle, as opposed to defending the household names of the past cycle.

‘Wealth management space changes for good’

Tim Williams, business development director, FinoComp

Microservices have enabled the wealth management industry to launch and adjust propositions to meet changing demands. They are making it easier for wealth managers to meet their consumer duty obligations and deliver value to the end client, and advice firms are embracing new technologies associated with microservices.

In 2023, I expect to see platforms continue to help their advisers grapple with consumer duty, while shrinking margins will push towards greater operational efficiencies. Meanwhile, the hyper-personalisation of microservices means people will be able to pick and choose the best-of-breed services.

Charging models may start to adapt so that customers can pay only for what they use, increasing fairness and transparency in the space.

This article first appeared in the February edition of Portfolio Adviser Magazine

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