Top investment ideas for 2023 – July update

Into the second half

As we entered the year 2023, the broad consensus was for economic growth to decelerate, inflation to decline and central banks to continue to hike interest rates. The situation turned out to be more complicated than that. While growth slowed, the global economy proved much more resilient than many would have anticipated. The same can be said about inflation. It declined, but core inflation in particular fell more slowly than many would have hoped, forcing central banks to stay on a fairly hawkish path.

This mix of slowing growth and rising rates would usually result in challenging financial markets, not too dissimilar to what we saw in 2022. However, the opposite happened. Stock markets recorded substantial gains and bonds also generated positive performance. Resilient growth and hopes for a soft landing helped to push the market higher – although admittedly most of the good equity market performance comes from a small number of stocks linked to artificial intelligence.

After the rally, the market is now pricing in a lot of optimism, setting the bar higher for the rest of the year – particularly as growth and inflation look set to slow further. This situation is good for bonds, but generally not for equities.

High conviction opportunities – Messages in Focus of the
House View

As the economic environment remains challenging and equity market valuations are high, investors need to be selective when it comes to taking on risk. Our Top Investment Ideas are designed to identify relevant opportunities. From our House View, we have identified seven messages in focus that can serve as guiding principles for investors. We introduced these seven messages in last month’s Top Investment Ideas update and are now putting them into the context of the most recent market developments.

These messages in focus are:

1. Buy quality bonds
2. Seek diverse and durable income
3. Look for equity laggards
4. Position for dollar weakness
5. Diversify with alternatives
6. Invest in infrastructure
7. Go sustainable

1. Buy quality bonds

Better-than-expected economic data in the first half of the year combined with central bank rate hikes boosted bond yields, providing investors with an opportunity to lock in elevated rates. Given declining inflation and no imminent recession, we see opportunities in high-grade government bonds (particularly US and Swiss bonds), investment grade bonds and select senior financial debt. Actively managed fixed income strategies can help investors take advantage of the breadth of opportunities.

2. Seek diverse and durable income

As central banks are slowly approaching the end of their rate hiking cycle, locking in a durable income stream is becoming increasingly attractive and important. Buying high-quality bonds is one way of doing this, but not the only way.In fixed income, one way of finding diverse and durable income is in emerging market hard currency bonds, where valuations are still attractive.

The sector should also benefit from lower funding requirements given a weakening USD. In equities, defensive dividend-paying equities are a way of earning durable income. Dividend-paying equities typically outperform the broader market in a downtrend as dividends tend to be less volatile than earnings.

3. Look for equity laggards

Stock market gains in the first half of the year were concentrated in a few areas – mostly technology companies linked to artificial intelligence – while the broad market generated moderate gains at best. With valuations of the best performance now stretched and growth cooling off further, we expect the gap between the leaders and laggards of the rally to close.

Investors should protect their holdings and rebalance into the laggards. In this context, we highlight emerging market equities or sectoral approaches that give higher weights to lagging sectors. For investors who have exposure to our Supertrends, this means favoring the Climate change and Infrastructure Supertrends.

4. Position for USD weakness

The USD has benefited from the Federal Reserve’s sharp interest rate hiking cycle. This is coming to an end at a time when we expect the US economy to significantly slow and the USA’s macroeconomic imbalances (large public debt and current account deficits) to weigh on the USD’s outlook. We would hence look to reduce USD exposure. Investors with the JPY, EUR, GBP or CHF as their base currency should strengthen their home bias and consider gold investments.

5. Diversify with alternatives

Hedge funds and private markets offer diversification opportunities for investors. Hedge funds in particular should help investors to build a more robust portfolio during market downturns and periods of economic uncertainty. Private market solutions such as private equity, private credit and private real estate can help to earn income and growth wealth more strategically.

6. Invest in infrastructure

Real assets have been a focus in the current environment of persistently elevated inflation. Infrastructure represents a real asset that has long been a part of our high-conviction Supertrends. Inflation and slower growth ahead have not derailed spending plans in key areas linked to upgrading infrastructure and supporting the net-zero transition, two areas that have received substantial support from governments in the USA and Europe.

What is also interesting for investors is the fact that infrastructure often operates on long-term contracts tied to inflation. Industrial stocks and companies linked to automation should also continue to benefit from this development.

7. Go sustainable

We have made the point about sustainable investing in the context of our ESG Integrated set of multi-asset ideas and we believe that green investments, decarbonization commitments and regulation will continue to drive the case for investing sustainably. Sustainable bonds, ESG leaders and transition pioneers offer interesting opportunities.