In 2022 when European equities fell by about 12%the three large averages have undergone their worst year since the financial crash of 2008, and the FTSE 250 – a useful indicator of the performance of the UK economy – fell by 19.7%even the most optimistic investors would admit that this period has been difficult.
With rising interest rates (0.1% to 3.5% since December 2021) to control the inflation spiral, analysts are warning of an impending recession – it’s no surprise that stock markets have had such a difficult 2022.
Naturally, some sectors have suffered much more than others. The construction and retail sectors, for example, experienced slowdowns in the fourth quarter of 2022 due to the reduction in the purchasing power of businesses and consumers. Elsewhere, the tech sector had an incredibly turbulent year, while the crypto market imploded with the collapse of crypto exchange FTX.
As the recession takes hold, it is clear that divergences between different industries will continue to emerge throughout 2023. So, with 30% of investors looking to increase their investments in stocks and shares (according to a recent HYCM survey), investors should be aware of the potential winners and losers in the stock markets over the next 11 months.
Challenges remain in the current economic landscape
Needless to say, the new year has not brought with it a clean slate for the economy, so many of the difficulties that plagued stock markets last year will persist into 2023 despite the more positive start to equities. in January.
Inflation will continue to have a major impact on investor decision-making this year, especially as more than two-thirds (72%) of investors do not believe inflation will be under control by 2024. Indeed, as much as the current rate of inflation has been caused by the rise in food and energy prices following the war in Ukraine, investors can expect prices to remain high until that a ceasefire is concluded. So while inflation may appear to be easing – down to 9.2% currently – the purse strings for businesses and consumers are likely to remain tight for the foreseeable future.
The Bank of England is likely to resume its efforts to control inflation at the first MPC meeting of the year by raising the base interest rate again. That said, with many economists predicting rates to peak at 4.5%, there is a risk that more central bank action will further dampen growth, deepening the recession and placing further constraints on consumer spending as that the cost of mortgage and credit card repayments would increase. . It would certainly aggravate a cost of living crisis that is already causing significant damage.
With declining purchasing power, consumers tend to make less discretionary purchases on things like travel, new clothes, or entertainment-related goods and services. Indeed, it will leave some sectors more vulnerable to weaker stock performance.
Sectors that could encounter difficulties in 2023
The fashion, travel and hospitality sectors, for example, are particularly sensitive to a depletion of UK consumer purchasing power and could therefore face difficulties in the coming months. Combined with rising business costs like energy, transportation and wholesale prices, profit margins in these sectors could take a hit, impeding growth. Thus, the value of their shares could fall, which investors should be wary of as we venture further into the recession.
Elsewhere, the IT and tech industry, which saw a torrid end to 2022, lost investors $7.4 trillion last year, and may face similar difficulties in the coming year. Rising interest rates make it much harder to access the capital needed to grow the tech industry. Likewise, with high inflation eating away at their margins, the current and – more importantly – future profits that tech companies have promised investors seem unlikely. Thus, the value of these companies could fall further, especially in the first 6 months.
Finally, shrinking profit margins mean companies are much less likely to embark on expansion projects as the economy slows. Thus, construction, manufacturing and even warehouse companies could see lower demand, which will inevitably have an impact on their stock market valuations and performance.
Sectors that could impress in 2023
Perhaps reasonably, almost one in three investors (30%) are looking to specific sectors that could withstand the recession in 2023.
The healthcare sector, for example, has seen a transformation three years since the start of the pandemic and offers investors attractive defensive options. Based on last year, this sector could outperform the rest of the market in 2023. To demonstrate this, we can look to the iShares US Healthcare ETF which fell just 4.4% in 2022 despite the tanking of the S&P 500 20%. In the UK, similar robust performance was seen by healthcare companies as AstraZeneca – year-to-date at time of writing – increased in value by 80%. Despite the challenging economic landscape, healthcare is an integral part of businesses, consumers and governments, so demand will be strong no matter what. To that end, 18% of investors plan to increase their holdings in pharmaceutical/healthcare stocks over the coming year according to the HYCM survey.
Demand for basic consumer goods, such as personal care products, food, beverages and other household items, generally remains strong regardless of the economic climate. Indeed, this trend has already led to the S&P 500 Consumer Staples sector outperforming the rest of the average, down only 3.5% in 2022.
Furthermore, the energy sector is promising for investors in the coming months, especially since it was the best performing sector in the S&P 500 (46% growth) last year. As supply continues to be uncertain as the war in Ukraine rages, energy demand from the United States and other non-Russian producers – in conjunction with higher prices – could generate significant returns for Investors.
The renewable energy sector is another industry investors should watch, as 24% say the current energy crisis has encouraged them to invest in renewable energy and ESG stocks. There are certainly opportunities to be had in this industry – over the past 15 years, NextEra Energy (NYSE:NEE) returns have nearly reached 1000%, while earnings per share have steadily increased to 8.4% over the past 8 years. As demand continues to grow among consumers, businesses and global leaders, these returns are expected to continue over the long term.
Final Thoughts
Despite the ongoing challenges investors will face in 2023, some sectors are certainly poised for a more promising year than others. Therefore, whatever sectors investors decide to pursue, due diligence and careful consideration will be required to navigate the coming months to protect their portfolios.
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*Any opinions expressed herein are personal to the person expressing the opinion and do not reflect the opinion of HYCM. This material is considered marketing communication and should not be construed as containing investment advice or an investment recommendation or an offer or solicitation for transactions in financial instruments. Past performance is not a guarantee or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no responsibility for the accuracy or completeness of the information provided, or for any loss arising from any investment based on any recommendation, forecast or other information provided by any employee. of HYCM, a third party or otherwise.
The market research was conducted between 11 and 18 January 2023 among 2,000 UK adults via an online survey by independent market research agency Opinium. Opinium is a member of the Market Research Society (MRS) Company Partner Service, whose code of conduct and quality commitment it strictly adheres to. Its membership with MRS means that it adheres to strict guidelines regarding all phases of research, including research design and data collection; communicate with respondents; conduct field work; analysis and report; data storage. The data sample of 2,000 UK adults is fully nationally representative. This means that the sample is weighted according to ONS criteria so that the gender, age, social level, region and town of the respondents matches the UK population as a whole. Within this sample, 777 respondents had investment portfolios worth more than £20,000 – this includes all assets from bonds and currencies to commodities, stocks and shares, but excludes any property used as a primary residence .
