A new regime requires a new playbook.
Last year ushered in higher levels of inflation, an end to ‘easy money’ policies and a flat-to-negative growth environment, marking a total break from what investors have experienced since the financial crisis.
Meanwhile, markets were buffeted by a series of unforeseen events, including the Russian invasion of Ukraine and the rapid succession of British prime ministers.
Rather than patiently waiting for the macroeconomic headwinds to pass, investors need to adapt.
Investors will have to zero in on specific countries, themes and asset classes that exhibit resilient characteristics.The answer to this lies in sourcing returns at a more granular level. Gains will still be possible, but not across the board.
Instead, investors will have to zero in on specific countries, sectors, themes and asset classes that exhibit resilient characteristics and benefit from tailwinds in the current environment.
Below, we outline three areas we have identified as promising.
High-quality heroes
One of the areas for 2023 we are interested in as a result of events in 2022 is the bond market – especially the high-quality corporate bond market.
This area offers compelling discounts and is one we want to leverage in our client portfolios this year.
Elsewhere in fixed income, emerging market debt fared comparatively well in 2022, and this could be a powerful play if the market recovers.
While gold and silver started off the year strongly, they soon came under significant pressure.Strong tailwinds include a weakening dollar, the prospect of slowing inflation, and China’s reopening.
From an equity perspective, we see opportunities in securities that offer an attractive level of income.
We expect dividend-paying stocks to fare better, alongside parts of the market that are less sensitive to interest rate rises, such as healthcare and consumer staples.
Our overarching focus remains on quality investments with resilient margins – and at reasonable valuations.
Silver lining
One pocket of the market that felt the strain in 2022 was precious metals.
While gold and silver started off the year strongly, they soon came under significant pressure as the dollar rallied.
With the dollar starting to come off its highs, we are beginning to see positivity come through for the precious metals market.
Adding to this, we believe there will be a larger focus on green energy infrastructure, for which silver is an important component.
We expect the next bull market to be fuelled by companies enabling the transition to a sustainable economy.While there has been a pick-up in demand for the metal as a result of this, we have not yet seen a pick-up in supply.
To us, this spells a positive market for silver in 2023 – and we are positioning our portfolios to capture this trend.
We are doing this through both traditional silver bullion exchange-traded commodities, as well as active funds that are buying stocks of gold and silver miners to tap into the equity component.
Putting planet first
After a strong period for broad equity indexes, we expect the next bull market to be fuelled by companies enabling the transition to a sustainable economy – one that is resilient, provides a good quality of life for all, stays within the limits of the planet, and keeps global warming to the two-degree threshold.
The opportunities in driving this transition are not just within renewable energy, but across all facets of sustainability.
One theme we are particularly excited about in 2023 is the increasing awareness around biodiversity preservation.
More than half the world's economic output is moderately or highly dependent on nature, with ecosystems playing a vital role in greenhouse gas regulation.
Awareness is only now increasing, with calls for mandatory disclosure from corporates around biodiversity growing louder.
We have invested into this theme through both a specific natural capital fund as well as through a series of positive impact and sustainable strategies.
Biodiversity, as well as the climate transition, water and waste management and the transition to a circular economy are just some of the multi-decade themes we believe are going to show strength against broader equities in 2023 and beyond.
James Penny is chief investment officer and Dan Babington is a portfolio manager at TAM Asset Management
