Where to invest in 2023? Fund managers respond

As the year draws to a close, it’s time to plan for 2023. Knowing which assets will achieve the best returns over the next twelve months and glimpsing which themes will be key in guiding our investment decisions. The economy looks very different today than it did just a year ago. As a result, it is now that investors are asking themselves what assets to invest in 2023 and which will be the winning and losing players. Here are the fund managers’ views on the investment outlook for equities, fixed income, emerging markets, socially responsible investing, and currencies, among other assets.

¿En qué activos invertir en 2023?

Artemis

• For a number of years, we have seen speculation following surging share prices, which has reduced the focus on fundamentals. This has created excessively high valuations in some parts of the market that have now started to unwind. We think this unwind has further to run and are therefore cautious on expensive companies that show signs of investor exuberance. We see less risk in companies that have been overlooked and trade on low valuations, but where there are signs of improving fundamentals.
• With the end of the low interest rate world, we think our discipline around valuations is likely to be a rewarding strategy as we progress through 2023. This leads us to be overweight China, Korea and Brazil at the country level and underweight India, Taiwan and Saudi Arabia. At the sector level, financials, industrials and energy feature as the largest overweights with materials and semiconductors the largest underweights.
• While the risks we highlighted earlier suggest 2023 will likely present a volatile and challenging backdrop for investors, we are comforted by the margin of safety reflected in the valuations of our holdings. As the chart shows, our fund offers a significant yield advantage compared to other markets.
• I also think it throws up a huge number of opportunities, both in the credit and equity side, to look for those companies that do have sustainable business models and the ability to generate cash. They are always going to be the ones that are best suited to this environment. Within the fixed income space, that ability to lend money to riskier companies, but for shorter amount of time, gives us that cash flow profile that allows us to adapt to a new sort of environment very easily. That degree of optionality is a powerful one. And that certainly informs how we’re setting up for 2023.

Columbia Threadneedle Investments

• Higher inflation and interest rates will remain part of the economic backdrop in 2023, but stability in both parameters should provide some support.
• A recession seems inevitable in Europe, while in the US we will have to keep an eye on the Fed and assess how much economic pain it deems necessary to win the battle against inflation.
• Fixed income: credit quality will certainly be a much greater determinant of success in 2023 than in 2022.
• Equities: the emphasis on quality (both by asset class and by region) will be critical to success because there will be companies far more able to survive the recession than others that are less well prepared.
• Europe has a cheap valuation compared to the US but faces greater hurdles. Emerging markets, dominated by China, are also relatively cheap but are being weighed down by geopolitical tensions and trade restrictions. The US, meanwhile, can be described as reasonable in terms of valuation and is the broadest and most diverse market. Again, the analysis will be key to identifying the right opportunities.

Credit Suisse

• The global economy will weaken in 2023 with the recession in Europe and the slowdown in the U.S. Despite this, major central banks are likely to continue raising interest rates at least through the first quarter of the year and industrial momentum will turn negative as liquidity conditions tighten.
• Analysts at Credit Suisse estimate Spanish GDP to grow by 0.8% and inflation to stand at 4.6% by 2023.
• The eurozone, the UK, and Japan are likely to continue to experience upward wage pressure until at least the beginning of 2023. Wage growth in these regions could persist even during an impending recession.
• The United States and the major eurozone countries are structurally less sensitive to rising mortgage rates. Smaller developed economies (UK, Canada, Scandinavia, and Australia) are more vulnerable.
• The ECB is expected to raise rates to 3% during the first half of 2023. Persistently high core inflation should prevent any rate cuts in 2023, but rates are likely to fall to 2.0% by the end of 2024 as inflation normalizes.

Edmond de Rothschild AM

• The manager expects a mild recession in the US and a more significant recession in Europe, with a contraction in corporate margins. In other words, profits will decline in 2023.
• The deterioration in liquidity is an incentive to seek protection as soon as the cost of liquidity decreases, regardless of the overall scenario.
• Equities: in the context of stabilization of US policy and likely normalization of Chinese economic policy after a very difficult period that saw growth plummet, emerging equities, after a long period of underperformance, have the greatest potential for a rebound. US equities, to a lesser extent, should perform well: while European equities should benefit from the gradual normalization of the Chinese economy that we expect in 2023, making them essential in portfolios.
• The healthcare theme should continue to outperform, as the sector, attractively valued, benefits from structural growth and is not sensitive to the ups and downs of the cycle. Also the Big Data and human capital revolution.
• Undoubtedly, our confidence in the disinflation trend leads to greater visibility of the potential of the fixed income market, especially as yields have recovered.
• The dollar should stabilize over the next year with U.S. policy rates.

J.P. Morgan AM

• Looking ahead to next year, the main unknown remains whether inflation will begin to moderate as economic activity slows.
• Five key areas will be top of mind for investors: fixed income rebalancing (the return of bonds), justifying the bullish view for equities, income investment opportunities and dividend defense, catalysts for an emerging market recovery and continued focus on sustainability.
• Equity: income stocks could enjoy a good year with dividends more resilient than earnings.
• Fixed income: offers increasing attractiveness, with bond expectations the best in over a decade.

LIFT Investment Advisors

• The firm detects investment opportunities in fixed income assets thanks to the current environment, in which very attractive issues with high yields and improved credit ratings are beginning to be found.
• Corporate debt is achieving the highest IRRs in recent years, and at the same time the fundamentals of the companies present a high degree of robustness, both in terms of business results and debt levels.
• Regarding durations, they are cautious, as increasing duration too quickly can ultimately be detrimental to the investor.

Mapfre

• It’s very difficult to develop a baseline scenario for portfolio management, since everything that worked well in the last decade (mainly technology, discretionary consumer spending and bonds) may not work that way in the future. Consequently, it’s time to adapt, to review the economics textbooks and to build even more diversified portfolios with the idea that having a broad spread of many different risks is better than having a lot of a few risks.
• The future belongs to sectors, companies or asset classes that have been reviled for a long time. And although MAPFRE advises against “market timing” (entering and exiting the market according to the prediction of the price of an asset), in this new market environment, investors need to be more tactical and make more changes to their portfolios to take advantage of new opportunities.
• First of all, you need to be aware of the reality of the market. Analysts take a slowdown in the economy for 2023 for granted, so they’re seeking defensive positions, and that means companies that are capable of maintaining their margins. As for bonuses, it’s possible that 2023 will bring some joy. Bank of America, for example, sees opportunities in fixed income during the first half of the year. And I believe that the horizon for Chinese equities will clear up. Regardless of what type of investor you are, though, one thing that’s crystal clear is that the instability will last until at least 2024.

Nuveen

• Inflation and pressure from interest rate hikes are likely to ease in 2023, but recession risks are increasing. Its central scenario calls for a mild recession in the US, but a worse environment in Europe.
• Investors should focus on non-cyclical asset classes and investments less correlated to economic growth.
• In addition, the firm suggests modestly extending duration and carefully assessing the balance between listed and private markets, given the sharp sell-off in the former.

State Street Global Advisors

• The global economic slowdown has intensified in both developed and emerging markets, leading them to cut their global growth projection to 2.6% by 2023.
• Equities: will begin a sustainable recovery in 2023, but the nervousness afflicting equity investors is unlikely to dissipate before mid-year. Focus on high-quality stocks, i.e. companies with stable earnings and solid business models.
• Opportunities in emerging equities are being limited by the weakness in Chinese markets and the strength of the US dollar. We expect distress and volatility to remain high in 2023.
• Fixed income: investment opportunities in global fixed income markets, including emerging market debt, now that prices have readjusted to attractive levels.
• The US dollar will peak and begin to decline in 2023, after a period of strengthening due to its relative yields and safe haven appeal in difficult times from the late 2020s.

TwentyFour Asset Management

• We expect the U.S. economy to remain robust and that, if a recession occurs in 2023, it will be relatively mild. Overall, we believe the U.S. economy should manage to grow slightly next year, helped by a pause from the Fed as inflation continues to fall. We expect inflation to remain relatively stable in the US.
• The 10-year Treasury bond will end the year near its current level of around 3.75%, although markets may begin to anticipate rate cuts by 2024, late next year. We expect a stable curve up to the 30-year point, but with the inverted 2s-10s curve persisting, as we think prime rates will remain unchanged or slightly up throughout 2023.

Wellington Management

• The firm expects the euro zone to enter a mild recession by the end of the year and GDP to contract by 0.5% in 2023. The energy sector will remain a major risk next year.
• Europe: core inflation has risen to 5% and now outpaces the US on shorter-term measures of momentum. We believe this dynamic is likely to persist, with European inflation remaining much higher than over the past 10-15 years and potentially higher than the developed market average.
• The European business cycle will remain volatile, with a wide range of outcomes, and inflation likely to remain uncomfortably high.
• United Kingdom: the UK economy also looks vulnerable to further challenges heading into 2023. UK policymakers have to contend with double-digit inflation, a tight labor market and accelerating wage growth.