Why I’m feeling optimistic about investing in 2023

Faith Glasgow reveals why she's feeling chipper about investing in 2023 and how she plans to keep the wolves from the door.

Last year was not a great year on the investment front for anyone, like me, who watched their growth-heavy portfolio being mauled by the macroeconomic and geopolitical wolves, kicking themselves for not heeding earlier warnings that trouble was a-comin’ in and barricading the barn doors.

But what’s a gal to do? I have belatedly rebalanced my lopsided portfolio towards what I hope is a more sensible spread. I’ve reduced my exposure to growth, bought some UK and income-focused funds and dipped a toe into the fixed interest pool. The guns are loaded and I’ve stockpiled beans and corn.

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So am I feeling more optimistic about 2023? To be honest, the portfolio is still crouching in a dark corner and licking its wounds, and I’ve not yet reached the point of venturing outside to frolic in the virgin snow of further investment potential in any meaningful way. Maybe I’ll pluck up a bit more courage as I recover from the yearly season of overindulgence.

But there are definitely reasons to believe that this year may shape up more successfully than the last one one has - bearing in mind, of course, that the bar is set pretty low.

Are the macro wolves retreating?

Consumer price inflation for November stood at 10.7%, only marginally down from the 41-year high of October, and I’m not Pollyanna enough to expect a return to anywhere near the ultra-low levels of the past decade. However, most commentators do anticipate that price rises have reached a peak, and the latest figures appear to back that up.

Interestingly, a recent poll of investment managers by the Association of Investment Companies (AIC) found that although three-fifths of respondents believe inflation has peaked, there’s widespread consensus that the Bank of England faces a struggle to get it back down to the 2% target. None expect that to be achieved in 2023, and more than a third think it could take until 2025.

Interest rates rose in December to 3.5% after the Monetary Policy Committee’s meeting, and are expected to climb further before they start to fall; the market is predicting a 4.6% peak by mid 2023. The AIC poll found that more than two-fifths of managers expect rates to be between 3% and 4% by the end of the coming year, although almost a third anticipate them to remain above 4%.

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Paul Dales, chief UK economist with consultancy Capital Economics, thinks the pace of rate rises from the MPC will ease; but he adds: “We think it will want to see more concrete signs that domestic inflationary pressures are easing before halting the hikes.” He forecasts a peak of 4.5% and no rate cuts until 2024.

Rate rises will make life even more difficult for mortgage holders approaching the end of their cheap fixed-term deals, and also for businesses who need to refinance or had plans to borrow to invest.

So I’m not upbeat about prospects for UK consumers or UK plc for the coming year. Recession is on the cards after the economy shrank by 0.3% between August and October, and it is forecast by the Bank of England to continue into 2024. Times are undoubtedly tough, and set to get tougher.

However, it’s interesting to look again at the AIC poll. When asked about their greatest investment worries for the coming year, managers don’t have a clear sense of foreboding around any specific issue. The greatest fear cited was slowing corporate earnings (22%), followed by recession (16%), inflation (11%) and rising interest rates (10%).

So is it easier to feel cheerful if I focus specifically on prospects for my portfolio? I think there are several reasons why the answer is a qualified yes.

1) Expectations on the up?

We have had a bad year all round. I suspect that a bit of good news – an end to the war in Ukraine, improvements in China’s Covid policy, or better-than-expected economic numbers, for instance – could help to underpin markets and boost sentiment, at least in some parts of the world.

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The AIC poll indicates that managers are anticipating a better year for global markets, with 56% expecting them to rise and only 22% expecting a fall. There is, of course, a valid argument that fund managers have a vested interest in talking markets up, but the optimists get my vote all the same.

2) Low valuations for decent investments

Of course, a lot of funds and investment trusts that I hold had much higher valuations this time last year, and not much is going to improve on that front until investors have a sense of the tide turning and venture back into the market.

However, there seems to be a sense that valuations among the mid-cap (and to a lesser extent smaller-cap) funds I’ve always liked may have turned a corner, having borne the brunt of falls during 2022 as investors retreated to less risky parts of the market.

Not only are valuations exceptionally low - broker Stifel points out that some trusts’ net asset values almost halved in value from their 2021 peaks to their 2022 low points – but there are expectations of an upturn in merger and acquisition activity as bargain-hunting corporates go shopping.

Recession and elevated borrowing rates mean there will be headwinds aplenty, but I hope that at some point in 2023, my mid and smaller-cap holdings could stage a decent recovery.

3) The UK bargain basement

The UK is still widely perceived to be undervalued. I added a couple of value-focused and special situations holdings to my SIPP last year, although admittedly after the value rally. So far, therefore, they have not done anything very much, and given the UK’s miserable medium-term economic prospects I’m wondering whether I may be waiting quite some time for meaningful signs of life.

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But I take comfort from the views of respected managers including Guy Anderson of Mercantile (LSE:MRC), Alex Wright of Fidelity Special Situations and Simon Gergel of Merchants Trust (LSE:MRCH). 

They clearly believe that the record low valuations of the UK market, in Anderson’s words, “should be supportive of future returns, while the nature of the sell-off should provide opportunities for active managers who can find the best valuation opportunities”.

4) Drip feeding

As a freelance writer, I pay occasional chunks of cash into my pension out of gross income (usually after I’ve worked out how much tax I owe HMRC), and then worry about where to invest it later.

Last spring, instead of allocating lump sums, I decided to drip feed the cash in my SIPP into a cross-section of funds, and it’s been a pain-free way to participate in the opportunities thrown out by the market falls.

The money has been dribbling into relatively cheap stocks across Europe, Asia and the UK; I’ve also been adding to my previously heavily trimmed holding in Scottish Mortgage (LSE:SMT) that way.

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The lovely thing about investing regularly is that you don’t have to actually do anything once you’ve made your choice of where to invest, and you certainly don’t have to think about market timing. When markets are falling, your money just buys more units each month, bringing the average cost of your investments down.

So, once things do start to improve, I’m hoping I will feel a little extra benefit from having made at least some keenly priced investments.

5) Global spread

As I have confessed before, I’m not really a very good investor. But I do like a nice global potpourri of holdings. Not many smell terribly sweet at the moment, but some parts of the global economy are better placed than others to recover.

For instance, Bruce Stout, manager of Murray International (LSE:MYI), takes the view that while the developed world is poised for recession in 2023, Asia and the developing world are in a much stronger position.

There, he says, “debt burdens remain manageable and scope for interest rate declines prevail, so we believe many businesses should experience a tailwind of improving macro-economic conditions, enhanced by longer-term, structural positives of favourable demographics and rising purchasing power”.

What better point to wish ii readers a happy New Year, and more prosperous times ahead? Here’s to the retreat of the wolves at everyone’s door.