Giles Coghlan, chief market analyst consulting for HYCM assesses the potential winners and losers in the world of investment for 2023.
Even the most optimistic of us in the world of investment would admit that 2022 was a difficult year to navigate. The three major U.S. averages had their worst year since 2008. European stocks shed about 12%, clocking in their worst annual run for 4 years. And while the FTSE 100 eked out a modest annual gain, the FTSE 250 – which correlates more closely to the UK economy – dropped 19.7%. For many investors, it was probably a year that they would like to forget.
However, when one considers the number of economic and political challenges that reared their heads in 2022, such a poor year is hardly surprising. Inflation, for instance, hit double figures for the first time since 1981, forcing the Bank of England to rapidly hike interest rates from 0.1% to 3.5% – their highest level for 14 years. Meanwhile, after years of slow growth – compounded by rising interest rates – the UK economy edged ever closer to a recession.
Of course, the impact of these economic challenges was felt more heavily in some sectors than others. The tech industry, for example, saw wave upon wave of layoffs and poor stock performances, while the crypto market collapsed in on itself in Q4. With recession on the cards, the construction and retail sectors also experienced downturns towards the end of the year – downturns that could endure in the next 12 months.
One month into the new year, therefore, the economic situation and outlook for investors appears to be rather bleak. However, as always, there are opportunities to be had for investors. And, as 30% of investors said that they are looking to increase their investments in stocks and shares in a recent survey conducted on behalf of HYCM, it’s worth exploring the potential winners and losers in the world of investment for 2023.
The economic situation will continue to be challenging
Obviously, a new year doesn’t always wipe the financial slate clean, and many of the challenges investors faced in 2022 will continue to influence the performances of their portfolios.
Inflation, for example, looks set to continue to impact the spending power of both consumers and businesses in 2023. In fact, according to HYCM’s research, just 28% of investors believe that inflation will be brought under control this year. For the most part, this inflation has been driven by the rising cost of energy and food, both of which have been catalysed by the war in Ukraine. While inflation is likely to recede a little as the initial shock of the conflict subsides, it’s less likely that prices are going to come down any time soon (unless the war ends). The pressure that consumers and businesses have been facing with their living costs and energy bills could remain at record levels throughout the year.
As a result, the Bank of England will continue its battle against inflation by hiking interest rates further, which is predicted to peak at 4.5%. However, the central bank risks stalling the economy to a greater extent and could deepen the recession. Because of higher rates, consumers could also face additional pressure on their mortgage and credit card repayments, aggravating an already devastating cost-of-living crisis.
With less money in their pockets, consumers will have less disposable income to spend on discretionary purchases like holidays or new clothes. Consequently, businesses in sectors that are more sensitive to UK domestic consumer spending power are likely to see a decline in sales and profits.
Sectors to be wary of
For instance, profit margins for companies in the retail, travel and hospitality sectors are likely to be squeezed as consumers conserve money to afford the rising cost of their household bills. Similarly, businesses will have less money to grow and invest, as sky high energy bills and wholesale prices will be eating into their profit margins too. As a result, we could see the stock valuations of businesses in these sectors suffering as sales decline and costs go up.
Another sector that could see further declines in 2023 is the IT/tech industry, which is struggling to stay afloat in the current recessionary environment, losing investors some $7.4 trillion last year. Interest rates have removed access to easy capital for businesses to grow in this sector, and high inflation has made businesses who promised profits in the future a lot less valuable. Consequently, as these economic factors continue to dampen the sector, valuations for tech stocks are likely to decline further for at least the first half of the year.
Finally, as businesses will have less capital to commit to expansion projects, manufacturing and warehouse companies will likely see a decline in their stock values in 2023 as demand for goods or services in these sectors slows.
Opportunities remain
As we enter a recession, 30% of investors say that they are targeting specific sectors that they think will be resistant to the slowdown. Fortunately, there are some sectors that will present investors with such opportunities in the months ahead.
Consumer staples, for instance, will continue to enjoy strong demand despite a reduction in consumer spending and confidence. Indeed, stocks for companies that sell products that consumers can’t live without tend to do better than the rest of the market irrespective of the wider economic environment. Looking back at 2022, the S&P 500 Consumer Staples sector contracted by just 3.5% last year, while the rest of the index suffered an 18% decline. A similar trend could continue in 2023, so companies that sell products like food, drinks, hygiene products and household goods could present investors with safer stock options.
Elsewhere, the healthcare sector has had a transformative couple of years since the start of the pandemic and could offer investors viable defensive options. Last year, the iShares U.S. Healthcare ETF fell by only 4.4%, while UK-based pharmaceutical company AstraZeneca shares value has grown by 80% in the year to date (at the time of writing). For obvious reasons, even during a recession, demand for medicine, drug development and healthcare providers will remain strong. As such, stocks in the healthcare sectors could be winners in 2023, which is perhaps why 18% of respondents to HYCM’s survey said that they would be investing in pharmaceuticals/healthcare stocks in the coming months.
Another sector that looks set to be a winner this year is energy, which was the best performing sector in the S&P 500 in 2022 with a total return of 46%. With supply disrupted by the war in Ukraine, natural gas from the U.S. looks set to increase in demand, while oil prices are likely to rise higher as well. Therefore, expansion in the U.S. energy sector could be swift, and should provide investors with some decent returns.
However, it’s also worth keeping the renewables sector in mind, as many investors would argue that the war in Ukraine is accelerating the shift to green energy. NextEra Energy (NYSE:NEE), for example, has enjoyed total returns of almost 1,000% in the last 15 years, while its earnings per share have grown at an 8.4% compound annual rate since 2005. Until at least 2024, the company expects to provide about 10% dividend growth annually. With interest in renewables growing amongst consumers, businesses and governments, this sector clearly provides investors with some enticing options for 2023.
Final thoughts
Although the economic situation will remain challenging this year, there are still some opportunities to be had, as well as some sectors that should be avoided. As such, it’s important that investors come up with a clear strategy for their portfolios in 2023 and reduce risk as much as possible. Indeed, some of the sectors listed above could help them do just that.
Giles Coghlan is Chief Market Analyst, consulting for HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the FCA.
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