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Investment 2023 outlook: Where will inflation go and which stocks and funds are value backing?


Rates of interest: Will the Bank of England get inflation under control and ease up on hikes next 12 months

War in Ukraine, inflation and rate hikes have dominated a difficult 12 months for UK markets. With a recession now looming, prospects for 2023 don’t look immediately favourable either.

Investing experts are nevertheless hopeful that central banks will ease up on rate of interest hikes next 12 months, ideally because of inflation being brought under control fairly than a nastier than expected economic contraction.

In addition they indicate that the UK market stays low-cost and unloved – international investors are apparently unreconciled to Brexit and the fallout for our firms’ ability to trade – even though it has been one among the higher global performers in a difficult 12 months.

Which means the UK continues to supply a great buying opportunity, especially if value stocks and income generating businesses are coming back into fashion.

The blue chip FTSE 100, where earnings are mostly derived overseas, is up 1 per cent on the 12 months on the time of writing. But on the house front, the domestically-oriented FTSE 250 index has lost 19 per cent of its value, and the FTSE All Share is down 3 per cent.

Meanwhile, financial pundits note that the bond market crash was one among biggest investment stories of 2022.

Rate of interest rises were already depressing bond prices, creating heavy losses for existing investors, when the UK Government bond market received an additional self-inflicted blow from the Liz Truss regime’s disastrous mini-Budget.

For those looking out for decent deals, that debacle has helped make bonds value a glance again after a few years once they were over-priced.

We round up views from investment industry experts on where UK equity and bond markets are heading next, and a few fund and share suggestions for the approaching 12 months below.

Inflation: Rate hikes prone to ease as central bankers attempt to avoid crashing economy

‘The principal source of pain in 2022 was arguably the persistence of eye-watering inflation, which had a knock-on effect on monetary policy and economic activity,’ says Janet Mui, head of market evaluation at RBC Brewin Dolphin.

‘The excellent news is that inflation is prone to slow sharply in 2023 for quite a few reasons.

 Inflation of products and services typically eases as demand falters in a recession. So, once inflation comes down, we will anticipate higher times ahead

Janet Mui, RBC Brewin Dolphin 

‘Commodity prices, including wholesale oil and gas, have fallen notably. Inventories of products are increase and shipping costs are falling rapidly, that are good signs for price pressures to fall.

‘Historically, rate of interest rises impact the actual economy and inflation, with a lag of 12 to 18 months. Inflation of products and services typically eases as demand falters in a recession. So, once inflation comes down, we will anticipate higher times ahead.’

Mui adds that the majority of huge and rapid rate increases are prone to be over in major developed economies, and predicts the UK rate of interest – currently at 3.5 per cent – will peak at around 4.5 per cent.

Central bankers are determined to fight inflation, but don’t need to overtighten and crash the economy unnecessarily, she points out.

‘Whether rates of interest will probably be cut in 2023 will depend on how quickly inflation comes down. At a best guess, rates of interest will plateau and stay high, and cuts are more likely a 2024 story.’

Ben Yearsley, investment director at Shore Financial Planning, says: ‘I believed inflation can be transitory and admittedly I have been totally unsuitable on that.

‘I assumed the Covid backlog would wash through the system fairly quickly but that combined with the results of Russia’s invasion of Ukraine has prolonged the issue.’

But Yearsley says it feels as if we’re at or have passed the height of inflation, in the event you take a look at petrol prices or Drewry’s World Container Index and find prices have stabilised or are falling.

small business

He nevertheless notes: ‘Wage inflation is now the concern for central banks as employment stays high – replacing employees is not easy. If wage inflation takes off, rates of interest could have to go higher to dampen demand.

‘Ultimately inflation is on the centre of investment markets. For what it’s value I do think by this time next 12 months inflation will probably be much lower than today each here and the US.’

Yearsley says the depth of recession within the UK will probably be key, adding: ‘Most individuals either think we’re in a single already or are about to enter one, subsequently adapt their behaviour and spending accordingly.

‘A shallow recession means rates will stay higher for longer, a deep recession will mean cuts are on the cards probably before summer.’

Investments: Sentiment is ‘incredibly weak’ so expect a bumpy road ahead

Aggressive rate cuts have abruptly yanked the world out of a protracted period of ultra-low borrowing costs, which had been supportive of economic markets for the reason that global financial crisis in 2008, says Bestinvest managing director Jason Hollands.

‘Unsurprisingly this has been ill-received by the markets with each equities and bonds sliding in tandem.

‘One manifestation on this reversal of fortunes is that the UK market has been top-of-the-line performers this 12 months, with UK larger corporations – those within the FTSE 100 – set to beat the calendar returns of the S&P 500 Index of US corporations for less than the second time in 13 years.’

Top stocks of 2022: The FTSE 100 has remained resilient in the face of global headwinds, but some stocks have fared better than others

Top stocks of 2022: The FTSE 100 has remained resilient within the face of world headwinds, but some stocks have fared higher than others 

Hollands says the UK’s blue-chip index has benefited from high exposure to energy and defensive sectors akin to healthcare and consumer staples, and minimal exposure to technology stocks.

But he goes on: ‘Sarcastically, UK equity funds have seen massive outflows by investors this 12 months, likely a results of investors being spooked by gloomy forecasts for the UK domestic economy and political events.

‘Company earnings overall actually held up quite well during 2022, so the slide in equity markets through the 12 months has primarily reflected a revaluation of corporations to more reasonable levels fairly than a deterioration of their profitability. Investor sentiment is now incredibly weak.

‘Investors should still expect a bumpy road ahead as attention increasingly moves on from inflation to the prospect of recessions within the UK, much of Europe and the US attributable to tougher financial conditions are felt.’

Hollands suggests investors subsequently take a comparatively defensive stance, avoiding businesses highly vulnerable to a downturn like retail, leisure and property, and specializing in those with robust balance sheets, high recurring revenues and robust pricing power.

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‘We proceed to favour large UK-listed corporations with international earnings. Valuations of FTSE 100 corporations are incredibly low-cost in comparison with their longer-term average valuations and other markets and it offers the very best dividend yield globally.’

Likewise, Mui says RBC Brewin Dolphin’s preference stays quality corporations with strong balance sheets, pricing power, and sustainable business models.

She warns weak growth and earnings could drag the market lower before decisive rate cuts help equities bottom.

‘Throughout history, equities are likely to deliver superior long-term returns. Timing the market is difficult, however the declines in prices we have now seen this 12 months give investors the power to purchase good corporations at more attractive valuations.’

Meanwhile, Yearsley reckons investors will start to understand the worth of excellent quality long run income streams and begin to progressively buy into UK PLC again.

‘The UK is unloved and dare I say it low-cost because it’s effectively de-rated this 12 months. With no sign of a return to the tech mania of the last decade and things like dividends being seen as necessary again, the UK is well placed.

‘Versus the remainder of the world, the UK looks to be 39 per cent low-cost – having de-rated massively since 2016. On other measures it is not so low-cost, but has still relatively fallen.’

What happened to bonds in 2022? 

A pointy sell-off in UK bond markets left many investors sitting on heavy losses.

As central banks hike rates of interest the returns from bonds, often known as their yields, need to increase as well to maintain luring buyers.

That makes the yields from older existing bonds look less attractive so investors dump them in a rush, causing bond prices to plunge.

But rising yields make newer bonds look more attractive, particularly compared with normally riskier stock markets.

We explored investment opportunities after the bond price collapse here.


What about bonds? Higher yields are attracting buyers

‘The worldwide bond market in 2022 will probably be remembered for being as difficult because it was in 1994,’ says Marion Le Morhedec, global head of fixed income at AXA Investment Managers.

‘Inflationary pressures fueled by geopolitical conflicts and imbalances between supply and demand led central banks to tighten their monetary policies abruptly and lift key rates.

‘The pace of the speed hikes was so fast, never before seen within the history of economic markets, that every one asset classes were impacted. In September particularly, we saw a bond crash within the UK and very high volatility.’

But Le Morhedec says the outlook for 2023 is beginning to brighten.

‘Firstly, absolutely the level of yields is at its highest, which adds to the attractiveness of the bond market. Secondly, the central banks’ bull market cycle appears to be mostly behind us.

‘And at last, the rebound in performance observed at the top of 2022 helps to revive investor confidence.’

She favours investment grade corporate bonds, and when it comes to sectors real estate – especially logistics and residential – banks, and insurance via subordinated debt (unsecured debt, which is repaid behind more senior debt).

What’s an inverted yield curve? 

A ‘yield curve inversion’ signals unusual behaviour in the federal government bond markets, and is normally a harbinger of recession.

The inversion occurs when market players demand higher rates of interest for loaning a rustic money within the short term than they are going to over the long run.

This breaks their usual practice of regarding debt that’s going be repaid quickly because the safest and reflects a definite insecurity in that country’s near-term economic health.

In additional technical terms, what can occur is the yield or return from 2-year US government bonds – often known as treasuries – gets higher than the yield from US 10-year bonds.

That is what market experts are talking about once they use jargon like ‘the 2-10 12 months inversion’. 

Ben Yearsley, of Shore Financial Planning, says: ‘Government bond markets have been the story of 2022. On the turn of the 12 months, the UK 10-year gilt yielded 0.97 per cent and the equivalent US treasury 1.51 per cent. Those yields today are 3.2 per cent and three.61 per cent.

‘The UK obviously had a mini meltdown in gilts within the Autumn. The pain on the long end has been immense – the 2071 gilt had a high of £143, a low in September of £41 and is currently £61 – by the best way gilts are “secure” investments!’

‘Yield curves inverting [see the box below] have been one among the 12 months’s dominant themes and that is still the case with the US two-year paying greater than the 10-year.’

Yearsley admits: ‘I’ve hated bonds for much of the last 5-10 years – when rates are at zero where is the upside for fixed interest investments?’

But he adds: ‘When rates are at almost 4 per cent and still rising well, there’s clearly loads of potential.’

Yearsley says rates are actually expected to peak at a lower level within the UK than previously thought and there could even be cuts in 2023, however the US is harder to call because it has less of an inflation problem and the economy still seems wonderful.

‘Nonetheless you take a look at it though, corporate bonds (and indeed some Government bonds) look good value with yields available in excess of 6 per cent in lots of cases.

‘When you can lock into those levels for the medium to long run what is not to love especially as inflation must be down below 6 per cent by the top of 2023.

‘I’ve bought bonds for my Sipp for the primary time since 2009 – so as to add some context I’m 46 and am an adventurous investor – though pragmatic may be a greater term.’

What do investors expect in 2023?

Investor confidence is behind where it was in 2022 after a bruising 12 months within the markets, says AJ Bell’s head of investment evaluation Laith Khalaf.

‘Expectations for 2023 are neither bleak nor buoyant, with almost half saying they’ve a neutral outlook for his or her portfolio in the subsequent 12 months.

‘Although at the underside end of the spectrum 17 per cent say they’ve a pessimistic outlook for his or her portfolio next 12 months, up from 9 per cent this time in 2021.’

A Covid resurgence not worries investors, compared with 30 per cent who cited it as a priority this time last 12 months, in line with AJ Bell’s survey of two,650 customers in December.

Inflation has now dislodged the virus as the most important threat to investments, with 32 per cent citing it versus 26 per cent last 12 months.

Investor poll: What is concerning you most about your investments for 2023?

Investor poll: What’s concerning you most about your investments for 2023?

Khalaf says: ‘Just 14 per cent of investors are forecasting a fall within the UK stock market in 2023. Although again that figure is higher than the ten per cent forecasting a drop in UK shares a 12 months ago.

‘Most expect market returns next 12 months to be relatively flat or deliver a positive return of as much as 10 per cent. Just 12 per cent think UK shares will return greater than 10 per cent.’

How confident are you about the outlook for your portfolio in 2023?

How confident are you concerning the outlook on your portfolio in 2023?

Investment funds, trusts and stocks to look at

Financial experts offer tips about which investments may be value a glance in 2023.

Darius McDermott, managing director of FundCalibre

VT Downing Unique Opportunities (Ongoing charge: 0.89 per cent)

A fund’s third anniversary is an actual milestone because it is deemed to be long enough to properly assess a manager’s skills, in line with McDermott.

‘Launched in March 2020, it is a multi-cap UK equity fund run by the highly-experienced Rosemary Banyard.

What’s an ongoing charge? 

The continued charge is the investing industry’s standard measure of fund running costs.

The larger it’s, the dearer the fund is to run.

The continued charge figure could be present in the Key Investor Information Document (KIID) for any fund, normally on the highest left of page two.

To trace down these documents, put the fund name and ‘KIID’ together in an online search engine. 

‘It has a well-defined process in search of corporations which have sustained competitive benefits, with low debt and good management teams.’

He notes: ‘Despite having a bias towards small and mid-caps, which have really suffered in recent times, the fund has to this point returned 47 per cent for investors vs 52 per cent for the IA UK All Firms sector average.’

Unicorn UK Smaller Firms (Ongoing charge: 0.86 per cent)

One among the worst performing sectors in 2022 was IA UK Smaller Firms, with the common fund on this peer group making a lack of 25.7 per cent, says McDermott.

‘Managed by Simon Moon and Alex Game, this fund did relatively well last 12 months, losing roughly 10 percentage points lower than the sector average – placing it fifth out of fifty funds.

‘It is a small, flexible fund with a solid investment process and a highly competent team. Additionally it is quite concentrated, which allows it to capture the performance from its best ideas.’

Kate Marshall, lead investment analyst at Hargreaves Lansdown

Jupiter Income (Ongoing charge: 0.84 per cent)

This fund invests in corporations the managers imagine are undervalued by the broader market, says Marshall.

‘This style has struggled lately and means the fund can fall out of favour through certain periods of the market cycle.

‘The worth investment style has the potential to do higher when rates of interest and inflation are rising, and the style got here back into favour in 2022.

‘This is not a guide to future performance though. The manager invests in a reasonably small variety of corporations, so each investment can influence performance for good or bad which may increase risk.’

She adds: ‘The fund’s charges are taken from capital, which could help boost the income but reduce among the potential for growth.’

Investing in 2023: In a tough year, which investments might be worth backing?

Investing in 2023: In a troublesome 12 months, which investments may be value backing?

Ben Yearsley, investment director at Shore Financial Planning

Montanaro UK Smaller Firms (Ongoing charge: 0.90 per cent)

Artemis UK Smaller Firms (Ongoing charge: 0.86 per cent)

Ninety One UK Equity Income (Ongoing charge: 0.84 per cent)

‘A massively oversold area is UK smaller corporations. Nobody wants them, everyone hates them, which after all piques my interest,’ says Yearsley.

‘I could pick from almost any fund or trust within the sector, but I’ll highlight two. The primary is a growth focused trust managed by a small cap specialist boutique, the latter can best be described as a GARP [Growth at a Reasonable Price] fund currently on a PE of 12.

‘The UK is mostly oversold, and I believe that would reverse as income, which the UK is nice at, becomes more necessary. Ninety One UK Equity Income is my suggestion on this area.’

Rob Burgeman, senior investment manager at RBC Brewin Dolphin

Persimmon: ‘Some sectors within the UK market have had a very bad six to nine months – but they’ve strong businesses inside them that are usually not going to go bust. Housebuilding is one among them, and Persimmon still looks just like the blue chip option within the industry.

‘Despite the recent change in dividend policy it’s prone to yield no less than 6 per cent, assuming the share price stays around the identical. But don’t bank on this for the dividend alone.

‘The UK still has a structural shortage of homes and there are still loads of buyers on the market – they simply cannot get themselves a mortgage. I would not necessarily rush out and buy it today, but for the long term there are worse things to own.’

Next: Burgeman says it’s difficult to be too optimistic about UK retailers in the intervening time, but Next is one among the stand-outs that may weather a troublesome period.

‘The retailer has been steadily buying up brand names which have gone to the wall in recent months, including Made.com and Joules.

‘Its online offering has never had a lot alternative of third party brands and this may place Next well for the upturn to return.’

Watches of Switzerland:’When asked concerning the impact of recession on its customer base, the CEO of a doorstep lender once quipped that it was ‘at all times a recession’ for them,’ says Burgeman.

‘The other is usually true for those at the opposite end of the dimensions. Watches of Switzerland is a purveyor of luxury watch brands, for which there’s at all times demand from well-heeled clientele.

‘The brands control supply so closely that there is nearly at all times a queue of shoppers at any given time, nevertheless things fare.’

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