David Hambidge, investment director, Multi-Manager Funds, Premier Miton Investors, considers whether there be more opportunities for investors in 2023 and where they may lie.
When it comes to investing, every year brings its unique set of challenges and 2022 was certainly no exception, with many parts of the world encountering the highest level of inflation for decades, including a huge spike in energy prices. Meanwhile the world’s second largest economy, China, saw its growth suffer from numerous COVID enforced lockdowns and this has also had a negative impact on global trade.
Naturally much of the blame for the poor performance of risk assets in 2022 has been apportioned to the war in Ukraine and this of course is partly true. However, the main reason why it was such a tough year comes down to the fact that the price of money has gone from virtually nothing to quite a lot. Ukraine war or not, interest rates were always likely to rise in 2022 although it is fair to say that none of us expected the speed and scale in rate hikes we witnessed, and the financial markets have not liked it one bit.
No doubt 2023 will also bring its own unique set of investment challenges and certainly from an economic standpoint this year looks like being a year of slowing global growth.
However, the markets already know this and will be more interested in the inflation data and the impact on interest rates. On the former, I suspect inflation across the UK, US and Eurozone will drop significantly from the lofty levels we have seen this year and as such interest rates will likely peak next year.
Nevertheless, it seems unlikely that price rises will get back to the 2% level that the Fed and other central banks are currently targeting and as a result interest rates may well stay at elevated levels for longer than is currently being priced into markets.
More opportunities in 2023
That said, following the decline in most financial assets in 2022, there do certainly seem to be more opportunities in 2023. Certainly, that seems true of the bond markets where an unprecedented jump in yields (and fall in prices) in both government and corporate bonds has resulted in a significantly improved risk/reward profile in this area. This is the complete opposite of a year ago when we felt that the lack of yield support in traditional fixed income securities would result in return free risk.
Unfortunately, it has turned out to be a lot worse than that and this has had a negative impact on those cautious portfolios that have relied on traditional building blocks of just equities and bonds.
Despite the improved outlook for bonds, caution is still warranted. Inflation is the enemy of this asset class and that battle is yet to be won. To us, US Treasuries look more attractive than gilts with the former having a higher yield, while the market will have to absorb a huge amount of gilt issuance next year which will provide something of a headwind. Meanwhile, in the corporate space, we prefer investment grade bonds to high yield with the former currently offering unusually high yields, while the latter will be more vulnerable to defaults in a period of slowing economic growth.
As far as equities are concerned, we remain cautiously optimistic, still preferring markets on a lower price/earnings ratio which includes the UK, despite it being one of the best (or least bad) performing stock markets this year. Meanwhile, we remain underweight US equities on valuation concerns.
Elsewhere, the UK commercial property sector is still coming around to the prospect of more expensive borrowing although with prices having fallen across the board there are certainly some interesting opportunities emerging from those companies that have been able to lock in long-term debt at incredibly attractive rates.
Finally, with the risk-free rate having increased significantly in the past year, the acronym TINA has well and truly disappeared. Today, investors have plenty of options in both lower risk and higher risk assets and that can’t be anything but a good outcome.
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