Three investment themes for 2023

It’s that time of year when everyone reaches for their crystal balls to predict what sectors could deliver better-than-expected returns over the coming months.

Which companies, industries and countries stand the best chance of making money in the current economic environment – and which are likely to struggle?

While no-one knows for sure who will be 2023’s biggest winners and losers, here we highlight three investment themes that may be worth considering.

Environment-friendly investments

The increasing awareness of our impact on the wider environment has become hugely important over the last few years.

One way to access this area is via the Ninety One Global Environment fund, which is co-managed by Deirdre Cooper and Graeme Baker. The portfolio invests in companies that contribute to positive environmental change through sustainable decarbonisation, which is the process of reducing carbon dioxide emissions. In a recent update*, the managers highlighted three main drivers of this decarbonisation story: regulation, technological developments, and changing consumer behaviour.

“There are underappreciated companies across all three of the main decarbonisation themes: renewable energy, electrification, and resource and energy efficiency,” they wrote.

Another option is the EdenTree Responsible and Sustainable UK Equity fund, which is managed by Ketan Patel. It invests at least 80% of its assets in UK companies that make a positive contribution to society and the environment through sustainable and socially responsible practices.

Fund manager Ketan finds companies that are out-of-favour, but with the potential to increase in value. Would-be holdings must also pass a rigorous screening process. He told us more about the fund and its investments in this in-depth interview earlier this month.

Benefiting from China’s reopening

China has finally reopened its borders after almost three years of isolation – and fund managers believe the route back to normality may be hugely beneficial to investors. The country’s zero-Covid policy has saved lives, but the strict restrictions have dampened its growth, according to Mike Shiao, Invesco’s chief investment officer, Asia ex-Japan**.

“We expect the reopening to be positive for domestic demand and may likely benefit service sector industries,” he said. “More importantly, we anticipate a substantial boost to consumer sentiment.”

Mike, who also manages the Invesco China Equity fund, believes there could be a re-rating of the internet sector, with policymakers having shown signs of easing stringent regulations.

“In our view, valuations already reflect most of the negatives arising from regulatory risk, and the sector may soon revert back to a structural growth mode,” he added. More generally, Mike believes cheap valuations provide a window of opportunity for investors looking to invest in Chinese equities. “Both Chinese onshore and offshore equities are currently priced at historically low levels,” he added.

Anthony Wong and Kevin You run the Allianz China A-Shares fund, which concentrates on stocks incorporated in the country and listed as A-shares on the Shanghai and Shenzhen stock exchanges.

In an analysis of China’s prospects, the fund group highlighted innovation, transformation, and investment as being the key drivers of China’s growth story***.

“Advanced-manufacturing sectors such as ecommerce, biotechnology and electric vehicles have the potential to add more value to China’s economy than traditional manufacturing, and investment flows reflect this,” they wrote. “China’s leadership role in these areas ensures that it will no longer be seen as a country that imitates others’ success.”

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Long-term opportunities in technology

It’s hard to imagine a year when technology won’t be influential – and there are five key trends that are dominant, according to Morgan Stanley. The company’s recent technology, media and telecom conference highlighted industrial companies in the early stages of digital connectivity and increasing technology in the insurance sector. Healthcare technology to improve patient outcomes, the growth in digital infrastructure needs, and the cloud/artificial intelligence completed the list.

Lauren Ares, a Morgan Stanley banker specialising in B2B information services and data analytics, said: “We’re in the very early innings of a multi-decade development in data, analytics capabilities and software within specific industries^.”

One way to access this sector is through the AXA Framlington Global Technology fund, which is managed by Jeremy Gleeson. It invests in companies engaged in the research, design, and development of technologies in all sectors, including IT and the internet.

In his most recent update, Jeremy acknowledged that macroeconomic and geopolitical events were the main drivers of sentiment within investment markets. However, he believes steps taken by central banks are having an impact on inflation. “While we are cognisant of the challenges, we also note that the technology sector is still poised to deliver growth,” he wrote. “Additionally, valuations in the space have contracted significantly in the past 12 months.”

Elsewhere, the Schroder Digital Infrastructure fund focuses more specifically on the ongoing transition towards a digital economy. This includes companies from around the world that are involved in sectors as diverse as communication services, real estate, industrials, and financials.

The portfolio, which is managed by Hugo Machin and Tom Walker, is based around the premise that technological advances are driving demand for data and associated infrastructure. It typically holds between 25 and 70 companies and ESG factors are an important consideration. This means it won’t invest in companies that cause significant environmental or social harm.

*Source: Ninety One 2023 Investment Views, Tailwinds strengthen for climate-solutions providers.
**Source: Invesco, 2023 Investment Outlook – China equities
***Source: Allianz, Why now is the time to reconsider China
^Source: Morgan Stanley, 5 Technology Investing trends for 2023
^^Source: AXA Investment Managers, Fund manager comment, 30 December 2022

_{Photo by Aaron Burden on Unsplash}