Investment forecast for 2023: hot sectors, income and growth

It’s the time of year when City analysts tell clients which areas of the stock market they think will do best in the year ahead. This one also shares their view on interest rates and inflation. 

Defensive and value stocks are likely to remain key investing themes for 2023 as markets await turning points for inflation, interest rates and growth.

In its year ahead forecast, UBS Global Wealth Management also continues to favour the energy sector despite it being the best performing so far this year.

It believes the backdrop for risky assets should become more positive as 2023 progresses, meaning those with patience and discipline to stay invested will be rewarded with time.

• Read about how to: Open a Trading Account | How to start Trading Stocks | Top UK shares

UBS’ overall assessment is that 2023 will be a year of inflections.

It thinks major central banks will conduct their final rate hikes by the second quarter at the latest and that the Federal Reserve could begin cutting interest rates by the year end, depending on how sticky inflation proves.

But as higher interest rates begin to affect the global economy, UBS expects a 4% earnings contraction in the US, a 10% fall in Europe and 2% growth in Asia.

These projections are below consensus forecasts, with much depending on developments in the Ukraine war.

UBS added: “US-China tensions are unlikely to lessen given Beijing’s increased focus on self-sufficiency, the Biden administration’s moves to restrict trade on security grounds, and the potential for discord over Taiwan.

“And, at an individual country level, the increased politicisation of economic issues like inflation and interest rates broadens the scope for radical policy interventions and market dislocations.”

UBS points out that defensive sectors such as consumer staples and healthcare should prove relatively insulated from the lower economic growth expectations.

• 14 UK shares to own in 2023
• Explore more of our content on UK shares
• Insider: chiefs load up on shares tipped to double

These sectors outperformed the MSCI All Country World Index by nine and 11 percentage points respectively in the first 10 months of 2022 and are expected to continue to outperform in the months ahead.

UBS added: “Valuations at 18.4 times 12-month forward price-to-earnings ratio for staples and 16.4 times for healthcare - are not cheap, but remain slightly below their 10-year average levels.”

Value stocks outperformed growth stocks by 18 percentage points in the first 10 months of 2022 and are predicted to continue this trend next year.

Even though peak inflation has likely passed in the US, a reading above 3% has historically favoured value stocks relative to growth. Value also tends to do well during periods of tight monetary policy.

UBS’ ongoing support for the energy sector comes despite this year’s returns of 33% versus a loss of 21% for the broader index.

It said: “In isolation, slower global growth is negative for the energy sector, but we think that the oil market is sufficiently tight to support higher prices even if demand falls.”

The bank points out that sector valuations are still only 7.4 times 12-month forward earnings, representing a 50% discount to their 10-year average.

• 10 great shares with profit margins to survive recession
• Bank issues recession warning after biggest interest rate rise since 1989

UBS also highlights the importance of income opportunities at a time of heightened uncertainty. In the past six largest market drawdowns, it notes that a quality-income strategy has outperformed the broader global equity market, including the 8.5-percentage- point excess return in the first 10 months of 2022.

In terms of riskier assets, UBS says that historically markets start to turn between three and nine months prior to a trough in economic activity and corporate profits.

However, it adds that history also tells investors that trying to anticipate a precise turning point for the market can often result in failure.

UBS said: “The best way for most investors to position for more favourable markets ahead is to keep a diversified portfolio, consistent with long-term investment plans.”