7 investment themes for 2023
The year 2022 saw the end of an era of low rates, low inflation and asset price growth. As we head into 2023, the world’s economies have changed dramatically, with an economic tightening under way.
Higher energy, food and consumer goods prices are fanning inflation without necessarily boosting productivity. Now, the spectre of recession is haunting many of the world’s economies, as central banks walk a tightrope between cooling rampant inflation without dampening demand and depressing wages.
Our investment teams of course need to navigate their way through these obstacles carefully – managing downside risks while positioning for upside gains. First Sentier Investors’ asset class experts share their ideas about what’s ahead in 2023.
Recession looms large
There’s a growing consensus many economies are likely to enter recession in 2023.
“Inflation in the US has recently seen a reversal in direction, signalling the peak may have passed and further softening could be on its way. There are concerns substantial policy tightening in the face of spiralling inflation will strangle growth and push major economies into recession,” Craig Morabito, Senior Portfolio Manager, Global Credit, said.
China’s challenges easing
Nigel Foo, Head of Asian Fixed Income, said the challenges facing China may ease in 2023, and concerns about the country’s property sector along with it.
Foo pointed to the possibility the three themes driving Asian credit market performance in the past 12 months are likely to have a more subdued impact in 2023. The three themes he highlighted are the Federal Reserve hiking interest rates to curb inflation, negative sentiment towards China, its retreat from zero COVID policy, and global recession fears.
“Government support aimed at boosting liquidity and reducing re-financing risks in the sector has strengthened in recent months. It now includes direct bond purchases and guarantees for specific developers. This is definitely a big positive for the sector,” he said.
Interest rate rises: time to take a breath?
While central banks aggressively raised rates in 2022, there is hope that they will slow down.
Kej Somaia, Co-head of Multi-Asset Solutions, said: “We expect central banks to continue to implement quantitative tightening measures, including increasing interest rates in 2023 – albeit in smaller increments than in 2022 – as evidence of inflation growth remains but continues to plateau.”
“While tightening has dampened equity valuations, corporate balance sheets have so far remained solid,” he said.
Co-Head of Multi-Asset Solutions
Pockets of opportunity in equities
Given all the uncertainty, equity markets need to be navigated carefully, Somaia added.
“Repricing in equity markets in recent months has led to valuation opportunities emerging. However, these opportunities need to be considered in the context of ongoing volatility and the potential for deteriorating economic conditions,” Somaia said.
“Global markets have seen selloffs and while valuations are more attractive than they were this time last year, we are cautious about 2023.” he said.
Infrastructure in the box seat
“We expect public policy support for infrastructure investment to remain strong globally, especially where it relates to the replacement of ageing infrastructure assets, buildout of renewables to help decarbonise electricity generation, and globalisation of natural gas markets,” said Peter Meany, Head of Global Listed Infrastructure Securities.
“We also expect private sector funding of new infrastructure investment to remain strong in 2023 although rising interest rates will likely see M&A activity slow. We anticipate a robust pipeline of capital investment opportunities for the majority of global listed infrastructure companies for the year ahead.”
“Some sectors within infrastructure could be well positioned to benefit from structural growth drivers, with communications infrastructure being one of these,” Meany said.
“Consumers and businesses continue to move activities onto digital platforms which underpins demand for capacity on communications infrastructure such as cell towers and data centres. In 2023, we expect carriers and mobile network operators to continue the multi-year rollout of 5G mobile technology which will require tower leasing”, Meany highlighted.
Credit’s time to shine
“Credit fundamentals remain broadly supportive, particularly in the US and Europe. Meanwhile, interest coverage ratios – which measure how comfortably companies can service their debt obligations – remain favourable on the whole,” Morabito said.
Morabito added that many companies have already locked in lower borrowing costs, and credit agencies are reasonably optimistic.
“Ample capital has been raised over the past three years through new bond issuance, as companies took advantage of historically low borrowing costs. Many firms have issued bonds with relatively long maturities, thereby reducing refinancing risk.
“Encouragingly, we are still seeing more upgrades than downgrades from major credit rating agencies, although the rate of upgrades has been moderating recently.”
Foo echoed this sentiment in his case for Asian credit: “At a yield of close to 6% compared to a historical average of 4-5%, Asian investment grade bonds are looking very attractive, especially for long term investors. The fundamentals of this asset class have also been resilient through previous downturns, and companies with healthy cash balances providing a compelling reason to increase exposure into this asset class for the year ahead.”
Housing and data: A bright spots for REITs
“We are positive on the residential-for-rent sector, which includes apartments, detached housing, pre-fab homes and student housing. The risk-adjusted returns currently offered by the sector are compelling as residential assets typically deliver stable cash flows through the cycle, said Stephen Hayes, Head of Global Property Securities.
“We are also positive on data centres as replacement values continue to rise, increasing barriers to entry which should support rental growth with tenant demand likely to show low economic sensitivity. The sector is well placed over the medium to long term as they are integral to supporting the growth of the digital economy.”
After a strong run during the pandemic, the team is more cautious on the short-term outlook for logistical warehousing.
“Risks of a recession in the short term could see tenant demand fall back from elevated levels. However, we still believe that any short term over-estimations of required supply are transitory, and will be outweighed in the longer term by strong structural tailwinds in the sector.”
Source : Company data, First Sentier Investors, as of 30 November 2022
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