Scott Kingsley, Senior Wealth Advisor
It looks like 2023 could be a challenging year for the worldwide economy and stock markets. Amidst the cost of living crisis, brought on by historically high inflation and rising energy costs, many countries are set to dip into recession. According to research, the average recession lasts around ten months, with the stock market said to look nine months ahead. Unfortunately, unless there is a significant weakening of inflation, some countries will experience a prolonged period of reduced economic activity. So where does this leave 2023 and prospects for short, medium and long-term investments?
Due to the challenges of recent years, there are several markets that may recover in 2023 which we will look at later. For now we will focus on sectors where there has been a degree of historic resilience to recessions, performing better than the average in relative terms. Some of the historically more recession-resilient sectors include:
When funds are tight, many people will look to reduce their shopping bills by considering own brand and cheaper alternatives. This is likely to see pressure on premium brands as consumers seek to save money where possible. Historically, discount retailers have performed relatively well in times of economic difficulties. However, the Internet and ever-growing competition have to a certain extent, reduced these historical benefits.
The consumer staples sector is another which has performed relatively well when economies are facing recessionary pressures. This market is heavily influenced by non-discretionary spending on items such as toothpaste, soap, shampoo and other everyday products. Dominated by huge companies such as Procter & Gamble, it will be interesting to see how inflationary pressure and consumer down trading impacts profitability.
When it comes to healthcare and treatment, if you need it, there is no alternative and minimal scope for delayed spending. While many people may review their healthcare insurance, perhaps removing expensive add-ons, on the whole, healthcare is a sector which performs relatively well during a recession. While maybe not showing the explosive growth some companies experience during times of economic growth; healthcare can offer a degree of security in difficult times.
Historically, in times of high inflation and recession, precious metals such as gold have proven to be a safe haven. While some experts may point towards the dollar as the best "safe haven" during times of trouble, others will look towards precious metals. Numerous precious metal collective funds and ETFs offer a useful means of gaining exposure to this area. If 2023 is as challenging as many are predicting, there may be increased demand for precious metals.
Utility companies supplying gas, water and electricity tend to show relatively steady growth, and will often have an attractive dividend yield. Unfortunately, with energy prices out of control, the next 12 months could see utility companies come under pressure. Traditionally, it can be challenging to cut back on energy costs, but consumers and businesses will need to consider cuts in the current environment. In addition, ongoing government assistance won't last forever, and nobody knows when markets will return to "normal", causing ongoing financial and public relations challenges for the sector.
Caution: these are not my investment recommendations for 2023! My investment philosophy, indeed, is to take a long term view, buy funds holding many of the types of stocks mentioned above (and beyond), and let the quality of the portfolio generate the long term returns.
That being said, this set of economic conditions will impact some assets more than others and I felt you might be interested to hear my general thoughts on them. Some investors may find it interesting to take a broader look at markets which might come under more pressure in 2023, creating potential buying opportunities.
Obviously, it is crucial to take professional financial advice before undertaking any investment, especially those deemed of a more risky nature.
The FinTech sector, financial technology, has seen a considerable increase in investment in recent years. Several FinTech companies have proven to be highly effective market disruptors, taking market share and income from recognised companies. Even though the recent increase in worldwide base rates (to combat inflation) has seen some investors become more selective, there is still genuine interest in FinTech projects.
While the UK has a prominent FinTech market, there is also considerable demand for this type of investment in Asia. When the FinTech sector began to grow, attracting billions of dollars of investment, many traditional banks were caught off guard. Interestingly, in light of the recent fallback in activity in the FinTech sector and reduction in valuation ratings, some traditional banks are reassessing the situation. Several US banks believe that some FinTech solutions offer better value in the current market, premiums having been eroded, and are waiting to pounce.
It is fair to say that the cryptocurrency sector has proven highly volatile over the last ten years. The recent demise of some stablecoins, together with a reduction in the price of Bitcoin, has certainly blown some of the froth from the sector. The current challenges facing the crypto assets sector will likely lead to increased regulation and a more investor focused regulatory structure. Ironically, any significant regulatory changes are likely to attract new investors. Many of them are reluctant to join what are currently unregulated markets.
We also know that several worldwide central banks are looking to introduce their own cryptocurrencies/digital assets. Again, this will create a significant focus on the sector and a potentially more trusting environment. While certainly not one for widows and orphans, the crypto assets market may be one to watch in 2023. Note I say “one to watch” not “one to buy”!
We only have to look at the disastrous UK mini-budget to see the impact of unfunded policies on what were already nervous markets. In addition, interest rates will likely increase in the short to medium term to combat inflation and the cost of living crisis. However, many experts believe that interest rates will overshoot in 2023.
One of the main challenges for the bond market is the fact that governments are already at differing stages of recession with varied short to medium-term recovery prospects. Indeed, recently we saw the US Federal Reserve suggest that the speed at which interest rates were expected to rise could slow significantly. Time will tell! Whilst a slowing of interest rate increases and eventual reduction would be positive for bond prices, any prolonged lack of solidity in this asset class would see my view of its place in portfolios shifting.
Worldwide economies, and the real estate sector, have had challenging moments over the last decade. Over recent months, the sharp rise in global interest rates has increased the cost of finance and could see many people pushed into negative equity. As a result, there is a potential knock-on effect on banking profits and demand for real estate. Nevertheless, dependent upon how long the recessionary environment lasts, there may be potential to pick up some attractive investments in the real estate sector during 2023 and beyond.
Many experts are also predicting an increase in mortgage defaults which will impact property prices. Naturally, the banking sector will be keen to avoid significant defaults, but this won't be easy, bearing in mind the current economic environment. However, in the long term, there has been a strong backbone of genuine homebuyers and those looking to invest in the private rental market. As a result, over time, real estate has tended to be a relatively steady performer with potential for rental income and capital growth.
You will find that the technology sector regularly experiences extremes on the upside and the downside. Much of this is investor driven, as new companies continue to seek funding, and it would be foolish to underestimate the power of sentiment. For example, under pressure from investors, Facebook recently announced significant job cuts, reining in what many saw as excessive spending over the last couple of years.
Many profitable and not yet profitable technology companies could eventually benefit from the ongoing economic challenges, prompting them to cut base costs to the bare bone. Consequently, when the technology sector recovery does come, well managed established companies and new entrants may be extremely well-placed to benefit. However, those who follow the technology sector will be aware that sentiment towards these types of companies can change in the blink of an eye. Finding the bottom of the technology markets is akin to "catching a falling knife"; therefore, caution is advised.
It is widely recognised that stock markets look nine months forward regarding valuations and sentiment. So, by the time the economic data confirms a recession, the chances are the stock market is already looking towards a potential recovery. However, there will likely be significant volatility in the meantime!
While volatility is the food of traders, those dependent on technical analysis and charts, long-term investors can also take advantage. Even though some sectors are more "recession-proof" than others, the reality is that as economic activity falls, all businesses and sectors are impacted. Any economic downturn will test a company’s financial stability, sometimes the ability to trade, as well as its long-term prospects. As long as a company's fundamentals don't change, there may be scope to introduce new or add to existing holdings with a long-term mindset.
An experienced broker/adviser will have seen many economic ups and downs over the years, sector and company-specific issues, and numerous shocks and surprises. It is, therefore, essential to utilise their experience and speak with your financial adviser about the short, medium and long-term prospects for your investments. Then, put together a long-term investment strategy incorporating short to medium-term movements and changing fundamentals.
Many experts believe 2023 will be a challenging year for the worldwide economy, particularly in the US, Europe and the UK. While Far Eastern economies have, on some measures, performed better in recent months, they will still be impacted by a reduction in worldwide trade. On the interest rate front, the US Fed and Bank of England have suggested that the speed of expected interest rate rises could slow in the short term. A member of the influential MPC commented that the Bank of England might even be open to an interest rate reduction if the UK recession were to be worse than expected.
Amid all of the rumours and counter rumours, potential flip-flopping of policies and uncertainty in the market, it is essential to tread carefully. However, there may be some attractive long-term investment/trading opportunities in 2023, especially if it turns out to be half as volatile as some experts suggest!
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