The year 2022 was indeed a challenging one for global investors, marked by many highs and lows. As we embark on another trip around the sun, there are many reasons that keep us going despite our fears.
Inflation to ease in 2023
Inflation seems to have already peaked last year. With supply chain bottlenecks easing and wage gains moderating, we may see further relief in inflation in 2023. As inflation subsides, the Fed will likely raise interest rates at a slower pace in the first half of the year and will eventually end its rate hike cycle this year.
Every bear market has an end
Looking ahead, markets still face macroeconomic headwinds from the Federal Reserve’s ongoing war against inflation but 2023 may see the potential start of a bull market. History shows that every bear market has an end and more importantly, it is followed by a stronger and longer bull market. In addition, the time spent in the market is overall more favourable than trying to time in and out of markets.
Exhibit 1: Bull Market Outperforms the Bear Market in the Long-run
Source: Edward Jones calculations, Bloomberg, Dow Jones
Strong fundamentals
The U.S. labour market stands strong even in the face of a global macroeconomic slowdown. In December, the unemployment rate dropped to a pre-pandemic low of 3.5% in the United States. The tight labour market, in turn, supports consumer spending, which is the backbone of the U.S. economy – 70% of its Gross Domestic Product.
Defensive sectors to hold up better than the broader market
Even amid rising prices, people continue to buy basic necessities. Hence, defensive sectors like consumer staples, healthcare and utilities make for a relatively safe investment theme in volatile times. On the other hand, cyclical sectors like industrials and consumer discretionary would pick up as the economy turns to recovery.
Defensive Stocks Watchlist#
Defensive Stocks ETFs#
Value stocks to outperform growth stocks
As the Fed embarks on its final set of rate hikes, value stocks are expected to perform better than growth stocks in the short run at least. But growth stocks would see some rebound once the Fed pauses its rate hike cycle. Even while buying the dip, investors should be cautious and pick companies with strong fundamentals and wide moats. Investors may also want to look at promising themes like artificial intelligence, biotech, cybersecurity, etc.
Value Stocks Watchlist#
Value Stocks ETFs#
Energy sector to remain bright
Energy stocks ended 2022 with stellar gains of nearly 60%, helped by a geopolitical crisis-induced rally in crude oil prices last year. While it is difficult to repeat this exceptional performance in 2023, there are reasons to be bullish on the sector that is undervalued and boasts better earnings expectations. Moreover, limited oil refinery capacity is expected to keep the oil supply tight and crude prices high this year as well.
Energy Stocks Watchlist#
Energy ETFs Watchlist#
Renewables
While crude oil will continue to fuel a big chunk of economic activity for now, the transition to renewables has begun – slowly but surely. Hydrogen, solar and wind energy companies are making inroads and will eventually grow to a scale to become commercially viable.
To conclude, following a bottom-up investment approach and analysing stocks based on their company fundamentals may work better than a top-down approach of emphasising on macroeconomic factors and market cycles. 2023 is indeed a year to be patient and selective.
Renewable Energy Stocks Watchlist#
Renewable Energy ETFs Watchlist#
To conclude, following a bottom-up investment approach and analysing stocks based on their company fundamentals may work better than a top-down approach of emphasising on macroeconomic factors and market cycles. 2023 is indeed a year to be patient and selective.
# Note: This content is merely for illustrative purposes and does not constitute investment advice or a recommendation by Stockal to buy or sell securities of any kind.
* Consensus rating and average price target based on Tipranks data as of 11 Jan 2023.