Growth stocks to buy for a winning 2023

There could be better news for investors next year if this bunch of City experts are right. Here, they name the shares that could thrive.

Growth stocks with mostly domestic revenues have been backed for outperformance in 2023 after a City firm today predicted a reversal in this year’s stock market trends.

Liberum’s strategy note backs a switch into domestic earners on the basis that rising interest rates should increasingly support sterling and the euro over the next 12 months.

In addition, it believes an expected decline in bond yields as inflation recedes should benefit growth stocks from the fourth quarter until the middle of next year.

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Liberum’s coverage of “buy” rated growth stocks with predominantly domestic revenues includes Next (LSE:NXT), Auto Trader Group (LSE:AUTO), Whitbread (LSE:WTB) and Rightmove (LSE:RMV) in the FTSE 100 index. Serco Group (LSE:SRP), Bytes Technology Group Ordinary Shares (LSE:BYIT), MITIE Group (LSE:MTO) and IntegraFin Holdings (LSE:IHP) feature on the FTSE 250 list.

Among the small-caps, Liberum’s analysts have “buy” recommendations on stocks including Trustpilot Group (LSE:TRST), Gym Group (The) (LSE:GYM), PayPoint (LSE:PAY), Oxford BioMedica (LSE:OXB) and SThree (LSE:STEM) and XPS Pensions Group (LSE:XPS).

Overall, the broker is backing UK small and mid-caps to outperform the FTSE 100 in the year ahead. Within the growth stock universe, it points out that domestic earners in the FTSE 250 account for 16.4% of total market cap compared to 2.8% in the FTSE 100.

The situation is even more extreme in the FTSE Small Cap index, where growth stocks with a domestic revenue base account for 30.8% of total market cap.

So far in 2022 the FTSE 100 has declined by just 1%, underpinned largely by commodity prices and the performances of heavyweights Shell (LSE:SHEL), AstraZeneca (LSE:AZN), HSBC Holdings (LSE:HSBA) and BP (LSE:BP.).

Today’s session included gains for Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) as investors eye the possibility of an earnings-enhancing 0.75% hike in interest rates when the Bank of England’s September policy meeting concludes on Thursday next week.

The impact of such a rise on the borrowing costs of Severn Trent (LSE:SVT) and United Utilities Group (LSE:UU.) put pressure on their shares today, while there was also weakness for consumer-focused stocks including Tesco (LSE:TSCO) and Sainsbury’s (LSE:SBRY).

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Overall, the mood has calmed after Wall Street’s Tuesday slump, when more than 4% was wiped from the S&P 500 on fears that a hotter-than-expected US inflation figure will trigger a 1% hike in the Federal Reserve funds rate next Wednesday.

As Liberum points out today, the moves by central banks in the coming weeks will largely determine the path of the economy and stock markets in the coming two years or more.

It thinks the government’s energy bill package will reduce the duration and severity of the coming UK recession and mean a GDP drawdown of about 2.3% across five quarters, on a par with the downturn seen in 1990-91.

Liberum’s best guess for the market bottom is the end of the year. That’s based on research that once markets have dropped 20% from all-time highs, the average time it takes to find a bottom is about the same as the time it took the market to drop 20%.

But given the ongoing rate hike cycle this could be extended to the second quarter of 2023. The broker adds: “The uncertainty around the timing of the market bottom is high, but when it comes to growth vs. value style performance, we have a bit more clarity.”

Liberum points to the example of the resurgence in growth stocks during the bear market rally in July, before central banks’ hawkish comments led to a repricing of rate hike expectations and renewed outperformance of value stocks.