10 top themes for investors to consider in 2023

Our latest round up of forecasts, predictions and opinion about 2023 includes a look at the next generation of growth stocks.

The search for growth stocks capable of filling the gap left by a maturing technology sector features on a top-10 list of themes for investors to consider in 2023.

Deutsche Bank believes the next era of growth leaders will be driven by the ability to capitalise on structural shifts in the economy or around the green transition, particularly renewables and materials as countries adjust their energy systems.

It said: “Unlike the growth stocks of last decade, the new growth firms will have to generate positive cash flows, not burn cash. They will need it to finance R&D themselves and acquire new capabilities.”

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For the tech sector, however, rising interest rates and a more hostile environment of inflation and slower economic output has resulted in the loss of the growth label. Many of these so-called mega cap FAANG stocks generate considerable cash and may now move towards being considered ‘value’ investments.

Deutsche Bank strategist Galina Pozdnyakova said: “Without the tidal wave of the FAANGS, the technology sector may no longer be the leading driver of stock market returns it was last decade.

“Despite that, these companies will continue to matter due to their relative size and ability to generate cash. Still, the retreat from tech can limit market-wide gains and redefine how investors see growth stocks. That will leave a gap for the new growth stocks to emerge.”

One of the other themes in Deutsche’s report considers the difficulties of dealing with good news should it arise in 2023, whether this relates to China, Ukraine or inflation. Markets are likely to move more rapidly than expected, leaving investors to ponder whether this will turn into another bear market rally or finally be the real deal.

Despite the selloff in 2022, Deutsche Bank points out the S&P 500 has so far posted 22 days where it jumped over 2%. This is the fourth most of any year since the Great Depression, as well as the most in any year with a relatively “small” market drawdown.

Luke Templeman, the bank’s director of thematic research, said: “So, amidst the (justifiably) pessimistic forecasts for 2023, it appears investors are jittery to be involved in any upside. Blame algorithmic trading, passive ETFs, or even Fear of Missing Out.

“Whatever the cause, when markets do eventually jump, the speed of the moves may catch investors by surprise.”

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This ties in with Deutsche Bank opening theme for 2023, which considers the expected pivots by the US Federal Reserve on interest rates and China on its zero Covid policy.

It believes the Fed and China are likely to drip feed easier policy into their respective economies so as to avoid an abrupt change that could be severely disruptive.

As both pivots are likely to be gradual, markets may not experience a spectacular one-off rally. Instead, it may end up being a volatile path to higher asset prices as investors struggle to pinpoint an exact pivot moment.

Templeman pointed out that most people can identify 15 September 2008 as the day that sparked the full-blown financial crisis. However, he said investors disagree on whether it ended in July 2009 when the US recession officially ended, in April 2013 when the S&P 500 regained its pre-crisis peak or in December 2015 when the Fed finally raised rates.

Other themes in the report include the potential for political stability as 2023 will be the first year of the 21st century without a general or presidential election in any G7 country.

Offsetting this, however, is the possibility that this year’s use of sanctions will encourage countries to further push the barriers on the types of economic capabilities they can use as trade weapons.

Templeman highlighted the possibility of multi-country buyer cartels, restrictions on the supply of rare earth metals and other green transition commodities, the nationalisation of foreign companies, further restrictions on foreign workers, and adoption of digital currencies.

He added: “A world with three or four powers all flexing their muscles means less globalisation and less growth.”

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Among the other themes in 2023, the bank considers the potential impact of a divided property market performance in the US and rest of the world.

It said: “Although house price drops appear inevitable everywhere, the stronger structure of the US housing market could add to its broader economic advantages – namely energy self-sufficiency and a (relatively) resilient economy.”