By Giles Coghlan, Chief Market Analyst, HYCM
In 2022 where European stocks declined by around 12%, the three major averages suffered their worst year since the financial crash in 2008, and the FTSE 250 – a useful indicator of the UK economy’s performance – declined by 19.7%, even the most bullish investors would admit that this period has been challenging.
With interest rates on the rise (0.1% to 3.5% since December 2021) to control spiraling inflation, analysts are warning of an imminent recession – it is no surprise that the stock markets had such a difficult 2022.
Naturally, some sectors have suffered to a much greater extent than others. The construction and retail industries, for example, experienced slowdowns in Q4 2022 as business and consumer spending power was diminished. Elsewhere, the tech sector had an incredibly turbulent year, while the crypto market imploded as the crypto exchange FTX collapsed.
As the recession sets in, it’s clear that divergences between different industries will continue to appear throughout the rest of 2023. As such, with 30% of investors looking to increase their stocks and shares investments (according to a recent HYCM survey), investors must be aware of the potential winners and losers in the stock markets in the next 11 months.
Challenges remain in the current economic landscape
It goes without saying that the new year has not brought with it a clean economic slate, so many of the difficulties that plagued the stock markets last year will remain in 2023 despite the more positive start for stocks in January.
Inflation will continue to have a major impact on investors’ decision-making this year, particularly as over two thirds (72%) of investors don’t believe inflation will be brought under control by 2024. Indeed, as much of the current rate of inflation has been caused by rising food and energy costs as a result of the war in Ukraine, investors can expect prices to remain elevated until a ceasefire is reached. As such, while inflation may appear to be decreasing – down to 9.2% currently – business and consumer purse strings are likely to remain tight for the foreseeable.
The Bank of England is likely to recommence its efforts to control inflation at the first MPC meeting of the year by raising the base rate of interest again. That said, with many economists predicting that rates will peak at 4.5%, there is a risk that more central bank action could stunt growth further, deepening the recession and putting additional constraints on consumer spending as the cost of mortgage and credit card repayments would rise. Certainly, this would exacerbate a cost-of-living crisis that’s already causing a significant amount of damage.
With spending power on the decline, consumers tend to make fewer discretionary purchases on things like travel expenses, new clothes or entertainment-related goods and services. Indeed, this will leave some sectors more vulnerable to a poorer stock performance.
Sectors that could face difficulties in 2023
The fashion, travel and hospitality sectors, for example, are particularly sensitive to a depletion in UK consumer spending power, so could face difficulties in the coming months. In combination with rising business costs like energy, transport and wholesale prices, profit margins in these sectors could take a substantial hit, preventing growth. Thus, their stock values could fall, which investors should be wary of as we venture further into recession.
Elsewhere, the IT and tech industry, which had a torrid end to 2022, lost investors $7.4 trillion last year, and will possibly be grappling with similar difficulties in the year ahead. Rising interest rates make it much more difficult to access the capital needed to grow in the tech industry. Likewise, with high inflation eating into their margins, the current and – more importantly – future profit that tech businesses promised investors looks unlikely. As such, the value of these businesses could plummet further, particularly in the first 6 months.
Lastly, shrinking profit margins mean that businesses are much less likely to embark on expansion projects as the economy slows. As such, construction, manufacturing and even warehouse companies could see demand decline, which will inevitably impact their stock market valuations and performance.
Sectors that could impress in 2023
Perhaps reasonably, almost one in three (30%) investors are looking to specific sectors that could be resistant to the recession in 2023.
The healthcare industry, for instance, has enjoyed a transformative three years since the pandemic began, and presents investors with some enticing defensive options. If the last year is anything to go by, this sector could outperform the rest of the market in 2023. To demonstrate this, we can look to the iShares U.S. Healthcare ETF which fell by just 4.4% in 2022 despite the S&P 500 tanking nearly 20%. In the UK, similar robust performances were seen by health companies, as AstraZeneca – in the year to date at the time of writing – grew in value by 80%. Despite the challenging economic landscape, healthcare remains integral to business, consumers and governments, so demand will be strong come what may. To this end, 18% of investors plan to increase their holdings in pharmaceuticals/healthcare stocks in the coming year according to HYCM’s survey.
Demand for consumer staples, such as hygiene products, food, drinks and other household goods typically remains strong, regardless of the economic climate. Indeed, this trend has already led to the outperformance of the S&P 500 Consumer Staples sector when compared to the rest of the average, seeing a decline of just 3.5% in 2022.
Elsewhere, the energy sector holds promise for investors in the coming months, particularly as it was the S&P 500’s best performing sector (46% growth) last year. While supply continues to be uncertain as the war in Ukraine rages on, demand for energy from the U.S. and other non-Russian producers – in congress with higher prices – could deliver some significant returns for investors.
The renewables sector is another industry investors should monitor, as 24% say that the current energy crisis has encouraged them to invest in renewables and ESG stocks. There are certainly opportunities to be had in this industry – in the last 15 years, the returns from NextEra Energy (NYSE:NEE) almost hit 1,000%, while earnings per share have increased steadily to 8.4% in the last 8 years. As demand continues to grow amongst consumers, businesses, and world leaders alike, these returns are likely to continue in the long-term.
Concluding thoughts
Despite the continued difficulties that investors will be grappling with in 2023, there are certainly some sectors that are set for a more promising year than others. Therefore, whichever sectors that investors decide to pursue, due diligence and careful consideration will be needed to navigate the next few months in order to protect their portfolios.
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The market research was carried out between 11th and 18th 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 MRS membership means that it adheres to strict guidelines regarding all phases of research, including research design and data collection; communicating with respondents; conducting fieldwork; analysis and reporting; data storage. The data sample of 2,000 UK adults is fully nationally representative. This means the sample is weighted to ONS criteria so that the gender, age, social grade, region and city of the respondents corresponds to the UK population as a whole. Within this sample, 777 respondents had investment portfolios worth in excess of £20,000 – this includes all assets from bonds and currencies to commodities and stocks and shares but excludes any property that is used as their primary residency.