Expert investment views:
Opportunities in bonds are highlighted, along with the chance to swoop on equities at attractive valuations
A nuanced approach is advised, rather than simply “re-risking” or “de-risking” portfolios
Attention is called towards “beaten up” smaller-cap US equities in particular
Investors are urged to see recent events as a prompt to reconsider their relationship to investment risk
Featuring this month’s experts:
1. What could 2023 have in store for investors?
While a recession in developed economies looks inevitable, the length and depth of the recession is likely to be mild. Labour markets remain in good shape, financial institutions are well capitalised, and governments are shielding the most vulnerable from surging energy costs. That said, the cost of borrowing has risen significantly, which could result in a downturn in the housing market.
Inflation is likely to slow sharply in 2023. Commodity prices have fallen markedly, inventories of goods are building up, and shipping costs are declining rapidly. Historically, interest rate rises impact inflation with a lag of 12 to 18 months. Once inflation comes down, we can anticipate better times ahead.
The hawkish tone from Federal Reserve officials has softened recently, and the Bank of England has pushed back against previously elevated interest rate expectations. As a result, we think most of the large interest rate increases are behind us. The Fed funds rate is likely to peak at around 5% in the second quarter, while the UK bank rate will likely peak at between 4% and 4.5% in the third quarter.
There are pockets of opportunities in bonds after the surge in yields and spreads this year. Investors are now able to lock in decent yields, with the potential for attractive price returns when interest rates eventually fall
In China, there are more concrete signs that the government is softening its stance towards Covid restrictions after widespread protests. The normalisation of Chinese activity will be incrementally positive for global demand.
We believe opportunities for long-term investors are emerging. There are pockets of opportunities in bonds after the surge in yields and spreads this year. Investors are now able to lock in decent yields, with the potential for attractive price returns when interest rates eventually fall.
The outlook for equities is less clear. Weak growth and earnings could drag stocks lower before a fall in interest rates helps them reach a bottom. The declines in prices we have seen this year give investors the ability to buy good companies at more attractive valuations.
Head of Market Analysis at RBC Brewin Dolphin
2. All eyes on global developments
There will be little cause for celebration when the world rings in the new year. Amidst war in Ukraine and energy shortages, the eurozone and UK will grapple with recession over a cold, dark winter. In the US, where consumer and corporate activity are comparatively stronger, recession also looms but will be milder. In parallel, China will slowly but surely reopen, helping to avert outright global economic contraction. But punishing worldwide inflation, while easing, will likely remain above central bank targets in both 2023 and 2024.
As the seasons turn, however, markets will begin to shift. The year ahead will be one of two halves: starting sometime in the spring, central banks will stop hiking interest rates, inflation will visibly ease and – supported by Chinese acceleration – a new cycle of global growth will begin. The recovery will be uneven, though, with Europe and the UK lagging the US, and developed markets growing far more slowly than emerging ones.
When it comes to risk assets, next year will not be a time for investors to “re-risk” or “de-risk” portfolios. Rather than ploughing their capital into equity markets or exiting them, prudent long-term investors will carefully observe catalysts such as major changes in the conflict in Ukraine, inflation trends and China
As markets shift, so too will investment allocations as investors navigate these changes. We will likely see bonds come back into favour as their correlation with equities reverses and diversification benefits return. While 2023 promises continued volatility, high-quality bond markets – and especially government bonds – should once again provide defensive benefits, reducing portfolio risk. When it comes to risk assets, next year will not be a time for investors to “re-risk” or “de-risk” portfolios. Rather than ploughing their capital into equity markets or exiting them, prudent long-term investors will carefully observe catalysts such as major changes in the conflict in Ukraine, inflation trends and China, where both zero-Covid policy and tensions with Taiwan are high on the 2023 risk radar.
Chief Economist & Macro Strategist at Quintet Private Bank
As this month’s experts emphasise, investors often have to get very granular indeed in their portfolio picks – and be highly responsive to a range of geopolitical and fiscal policy developments which affect valuations and yields. All this is likely too much for one person, which is why the best wealth managers draw on the intellectual capital of a whole institutional-grade research team.
If you aren’t hearing these kinds of insights from your advisor (or are struggling on your own still), why not let us arrange some no-obligation discussions with the leading advisors on our panel? Better results, and far reduced worry about your investments, are close at hand.
3. Value-hunting in smaller-cap US stocks
The US market has been the best performing index in the last 20 years, and arguably the most dynamic and deep capitalist market in the world. However, sitting here today, we are nervous of indexed exposure to US large capitalisation stocks, i.e. the S&P 500 index.
Why? Because the S&P is dominated by the FAANGs – US internet and technology stocks – and we are all too aware that the companies that led the last cycle rarely if ever get to lead the next. The other reason is one of value: the S&P as a whole looks too expensive for a market about to go into a profits downgrade cycle.
Our solution has been to look to the beaten-up smaller capitalisation end of the US market. Here we can find inexpensive cash-generative stocks which march to the beat of a different drum.
Our solution has been to look to the beaten-up smaller capitalisation end of the US market. Here we can find inexpensive cash-generative stocks which march to the beat of a different drum
Specifically, I have been buying the De Lisle America fund for exposure to mid-cap (20% of portfolio) and small-cap (75% of portfolio) US stocks. The manager, Richard De Lisle, has over 40 years of experience and an enviable track record, looking for pockets of value within the US small-cap market. He manages the fund in an unashamedly esoteric fashion, aiming to make money rather than track an index, with top picks including Winnebago and Build-A-Bear Workshop, and a heavy weighting in “community banks”, local state orientated banking businesses, and oil stocks.
The portfolio as a whole trades on a single digit price earnings multiple, a far cry from the large-cap index which still trades on 18 times earnings (source: Bloomberg, 5/12/2022), and there are hedged share classes available for those who want it. Opportunity knocks.
Private Clients Investment Director at Tyndall Investment Management
4. Volatile times: Reconsidering the risk conversation
Recent conversations with new clients who are leaving their previous adviser, has seen many surprised by the extent of the decline in their portfolios. Their investments are simply not matched to their own expectation of the risk they wish to be taking.
When you meet an investment manager for the first time, one of the key points on their agenda for discussion with you will be risk. “We need to identify your attitude to risk”. You will most likely be handed a risk profile questionnaire to complete. This usually comprises 15 – 20 multiple choice questions. Once you have ticked your choices, the result of the questionnaire will be assessed and that will settle your risk profile. The questionnaire will be filed, and the conversation moves on.
The nub of this is always that if you take more risk, over time you will reap greater returns, but you must be prepared for ups and downs along the way.
All of these questions can be answered with cash flow forecasting tools, which allow your financial circumstances to be modelled in their entirety and what-if simulations run
However, in my experience as a Chartered Financial Planner the risk which engages my clients most, is the risk of running out of money. At some point in retirement, those valuations and charts you have been reviewing annually may indicate a time when your funds will no longer support the lifestyle you want. This could be okay if you have other assets or you’re happy to downsize from your family home. But for some, it may not.
Wouldn’t it have been better to have considered key questions, such as ‘How much can your portfolio sustainably deliver over the long-term?’ ‘What if returns aren’t as high as initial assumptions suggested?’ and ‘Should I have looked at scenarios where returns were not so strong?’. All of these questions can be answered with cash flow forecasting tools, which allow your financial circumstances to be modelled in their entirety and what-if simulations run.
Active financial planning wins over simple investment management. As financial planners, we do more than just manage your money. We look beyond your portfolio to assess your total financial picture, enabling you to make important strategic decisions about your finances from a position of knowledge. This helps open up a clear path to your secure financial future.
Partner at Partners Wealth Management
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.