15 investment themes for your radar in 2023

This article was first published on Livewire Markets on Wednesday 18 January 2023.

2022 was a year of macro. Runaway inflation and the rate hikes central banks responded with dominated headlines, and everything else seemed to feed from that. 

These problems remain with us still, but they've been largely priced into markets. 

So how do you parse the noise from the themes that matter?  

You could spend hours of your day pouring through white papers, charts, and data. Or, you can let our experts do the heavy lifting for you. 

So in Livewire's Outlook Series for 2023, we ask 15 fundies to describe the investment themes they're keeping an eye on. 

Will warnings of recession manifest? Will China's reopening buoy markets? How will the energy transition progress? All of this and more is covered below, which you can watch, listen to or read. 

Our featured experts include:

• Mary Manning, Alphinity Investment Management

• Dion Hershan, Yarra Capital Management

• Jun Bei Liu, Tribeca Investment Partners

• Marcus Padley, Marcus Today

• Ben Clark, TMS Capital

• Nick Griffin, Munro Partners

• Andrew Clifford, Platinum Asset Management

• Catherine Allfrey, Wavestone Capital

• Michael Goldberg, Collins St Value Fund

• Matthew Kidman, Centennial Asset Management 

• Nick Sladen, LSN Capital Partners

• Anthony Aboud, Perpetual Asset Management

• Robert Gregory, Glenmore Asset Management

• Romano Sala Tenna, Katana Asset Management

• Oscar Oberg, Wilson Asset Management 

Note: We would like to thank the fund managers for sharing their insights ahead of 2023 in the spirit of the Outlook Series. This article is not, nor is it intended to be, a set of recommendations. Please do your own research and seek advice from a professional before making any investment decisions of your own.

This vision was filmed on the 6th of December 2022. 

Edited Transcript 

Ally Selby: Hi, I'm Ally Selby.

Matthew Kidman: I'm Matthew Kidman. And what we've done today is asked our fund managers what is the burning issue, what's the theme they're trying to get their arms around at the moment.

Ally Selby: It certainly will be interesting to know after a very difficult 2022.

Mary Manning: Not if, but when China opens

Matthew Kidman: Mary, themes have been a big part of investing over the last three years. What's the theme that's got your attention as we clock out on 2022?

Mary Manning: I would say two things. The first theme is China reopening, and not just whether they're going to reopen, but when and what the trajectory looks like and what the best stocks are in terms of risk and reward. And the second thing is the outlook for tech in the US in 2023. The NASDAQ is down almost 30% in 2022. You have some of the big FANGMAN stocks, which have been absolutely crushed. So we're spending a lot of time debating what the outlook is for those big US tech stocks in the coming year.

Matthew Kidman: So I take it from that you are bullish on the China reopening. That is a good thing.

Mary Manning: It is a very good thing, but you can't just pile into anything that has to do with China. Be very specific about which stocks are going to benefit from China reopening and the timing in which they'll benefit from that, and how that will come through in the earnings cycle.

Dion Hershan: Australia can thread the needle with a soft landing

Dion Hershan: One of the most live debates we have as a team is obviously around the health of the economy, what it means for inflation, and what it means for interest rates. It's an active debate. 2022 was hugely unpredictable, and we have to assume 2023 will be as well. Our central case though is for the Australian economy, it's a soft landing and it's a soft landing because the economy was strong going into it. Interest rates have gone up eight times, but that's been reasonably well absorbed by the economy and by the consumer. A lot of lead indicators have inflation going down. Commodity prices are still going strong. So you put that together. Our view is it's a soft landing for the Australian economy, and it's actually a good environment for business and it's actually a good environment for equities.

Ally Selby: But what about the labour market?

Dion Hershan: There have been acute labour shortages, but it's worth understanding the root cause. The root cause was the economy was growing too quickly and immigration ceased or net immigration ceased during lockdowns, during COVID. As you project forward, both those things are actually starting to reverse. The borders are open, the economy is slowing down, it's taking the heat out of the labour market. So there's no doubt that there will be inflationary wage increases. So you need to own the businesses that have pricing power because you can pass that through to consumers without denting demand, you're well positioned.

Jun Bei Liu: These sectors will benefit from China's reopening

Jun Bei Liu: I must say this is normally the most exciting time of the year because our team just started thinking about what to do for the next 12 months. Right now, the key theme is really how we play this China reopening. China clearly is going through its slow reopening phase and we want to take advantage of it. Clearly directly investing in Chinese equities will be fantastic, but with the domestic portfolio, how do we gain leverage to it? The road ahead is going to be a little bit bumpy, like what we have seen in so many other economies when they reopen. But with this one we know it's coming and there are a few sectors that we are thinking potentially would do quite well. When this reopening does take place, it does bode pretty well for the resources companies. The reopening will mean initial demand might be still very slow to recover, but net-net it will be quite positive for sentiment for the commodity space.

Ally Selby: As in iron ore? Which commodities in particular?

Jun Bei Liu: I think it's probably more towards copper. Iron ore will have good support over there and across a few other names will be pretty good as well.

Marcus Padley: Don't confuse bear and bull runs

Marcus Padley: There are three things I think you've got to do with the market. You've got to get the market right. People always come at it, they're after stocks, but you've got to get the market right, sector themes right, and stocks right. So we're debating the market, and I can't tell at this point in time whether we are in a new bull market as policy aggression peaks in the US and inflation peaks or whether we are in a rally in a bear market. So that's where we are. We have just topped out at the perfect resistance line if we're in a bear market. So it looks like we're like we've had a rally in a bear market rather than a new bull market. So we're wondering whether we should be in the market.

Ben Clark: Earnings, earnings, earnings

Ben Clark: I think you now turn your attention to earnings because this year's been one of those macro years where stocks have all been thrown in a bundle, and they've been traded around with what's going on in rates. But I think hopefully we're getting pretty close to the peak of the rate cycle now. You start in 2023 to see what damage that's done to industries, to different companies' profitability, and you also think about what the market's expecting and has the market overcompensated potentially for the damage. So I think earnings are always important, but next year they're going to be more than ever.

Matthew Kidman: You sound a little bit more optimistic than the rest of the market on earnings.

Ben Clark: I think I am. We've just gone through the AGM season, and to me, most of the companies we own reaffirmed guidance. I mean guidance is broad or a bit conservative probably at the moment. The mini reporting season we saw I thought was pretty good. So for now, earnings are holding up to me quite well. Next year the proof's going to be in the pudding and a lot of it will depend on when this rate cycle finally hits, but I think I'm just a bit more positive maybe than the market's feeling about it.

Nick Griffin: Finding the beneficiaries of decarbonisation

Nick Griffin: So from our point of view, we've been talking for quite some time now about decarbonisation, pretty much since 2018. And if anything, everything we talked about then has actually accelerated in the last 12 months. So one, Europe's been in an energy crisis and what are the consequences of European's energy crisis. And two, the US has passed the inflation reduction act, which basically gives you more than a decade of support for the energy transition is really the most ambitious energy transition plan in the world. So from our point of view, we're trying to find the benefits, beneficiaries of that. We think it's a long-term trend and it's a new area even though we've been looking at it for four years, it's still new and we're basically spending a lot of time trying to find the biggest winners out of those areas.

Andrew Clifford: Decarbonisation is a lot more than solar panels and wind farms

Matthew Kidman: Andrew, in your job you get to look right around the world and at everything. What's the theme or the topic you're trying to get your arms around right now?

Andrew Clifford: The big theme, it's not just for now but for the next decade, is going to be the energy transition, the decarbonisation. And there are just so many opportunities here, and I think a lot of people are, obviously, everyone's focusing on this, it's an obvious topic, but people are very focused on the straightforward, buy solar panels or wind farms. But there are so many more interesting areas here, a lot of the enabling technologies, semiconductors for example. So I think this is just going to be a really rich area for investment this year and next year and for some time to come.

Matthew Kidman: Could it be a dangerous area? Could you lose money?

Andrew Clifford: Oh, I think it's an area where there are real winners and losers. So there are shorts to be had here. For example, we are nowhere near as optimistic as most people about the hydrogen economy. We think it's fairly marginal.

Catherine Allfrey: More pain on the way for commercial real estate

Catherine Allfrey: The one thing that we are really debating for '23 is where is the pain going to be. Clearly, we've had 300 basis points moves in interest rates, so it's going to hit the consumer as we know. But that's probably not until the second half of 23. But the other area that we're spending a lot of time on at the moment is commercial real estate. We actually think there's going to be quite a bit of pain in that area just judging by the listed share prices of REITs at the moment. Big discounts. So that actually tells you there's some pain to come in that property sector.

Michael Goldberg: Finding value in gold companies

Michael Goldberg: Gold is the topic we're discussing the most at the moment, primarily as a hedge against inflation. The challenge for us though is that being value investors, it's hard to make a case to invest in physical gold. It doesn't have a coupon, it doesn't grow. You can't stick two grams of gold in a room and come back later and hope to find three. It is what it is and that's all that it is. So one way you can approach that is by investing in gold companies and that's great. I don't think it's a perfect solution. What we are really looking to try and do is invest in gold companies via convertible notes so that way we create a coupon, which is great, and we also get the upside when things go well and hopefully gold prices go much higher.

Matthew Kidman: Interest rates and how high they'll go 

Matthew Kidman: Well, we all sit facing each other at Centennial and so we've got to talk to each other. And the one subject that just keeps coming up at the moment, and I don't think it's unusual to anyone, is interest rates. Where are interest rates going? What is the Federal Reserve in the US going to do? What's the reserve bank going to do? So if there's one subject that dominates our conversation, how high do interest rates go?

Nick Sladen: 2023 will be about micro, not macro

Nick Sladen: We think that 2023 is going to be more about the micro than the macro. So it's going to be a return to bottom-up fundamentals. We think we're going to be talking more about things like revenue costs and valuation and less about inflation and interest rates. So back to good old-fashioned stock picking. And within that complex, we think that areas like return on invested capital will be a really big focus for next year as businesses that can self-fund themselves will do better than those that can't. Strong balance sheets will enable businesses to complement any organic growth with acquired growth. And we've already seen examples of that in 2022, and we're expecting more of that in the small-cap universe in 2023.

Anthony Aboud: Who will win from carbon trading (and who will lose)?

Anthony Aboud: Most interesting thing, we're spending a lot of time on this, is the path to decarbonisation. There is a lot of policy going on at the moment, and the ALP has come in and promised a 43% reduction in carbon emissions by 2030, at which point in time they have 82% renewable energy. And a lot of people have focused on the battery materials and we have as well. That's the first degree, but we're looking at the second degree. What happens when the price of carbon starts going up? Who are the winners? Who are the losers? And this is something that we don't feel that a lot of people are focusing on. It's very topical right now because there's currently a review of the safeguard mechanism and a Chubb review into the carbon credits. Both come out on New Year's Eve. So it's going to be an interesting news day for us.

Robert Gregory: Expect some new market leaders in 2023

Robert Gregory: The big topic we're discussing right now is the market leadership going to 23. This year we've seen large caps outperform small caps, resources outperform industrials. But I think going into next year, I think we're going to have a bit of a change up. I think small industrials in particular, that's fallen 19% year to date. I think there's a lot of really good companies in that part of the market. I think that's some of the headwinds they've faced will moderate next year. I think that can do really well. That's what we're discussing for next year.

Romano Sala Tenna: Want to predict corporate earnings? Look to the consumer

Romano Sala Tenna: We are trying to understand where consumer spending is at, and how much that's going to impact corporate earnings. And when that really starts to bite. There are four well-documented things that are impacting consumer spending: interest rates, general inflation, power utility prices, and also the impact on private wealth due to the property collapse. So these things are all impacting consumer spending. We're trying to work out exactly when that starts to bite in terms of corporate earnings.

Matthew Kidman: And is it just a slow down or is it a collapse? Are you trying to work that bit out?

Romano Sala Tenna: I think we're slow walking off a cliff. I think that these things are very material. I think that at the moment, the US is six to nine months ahead of us, and we saw last month an increasing personal credit card debt - 15% month on month. So they're still spending the same habits, but they're borrowing money to do that. I think in Australia we'll get through Christmas, and I think then you'll see a dramatic change in spending habits in the new year.

Oscar Oberg: Companies are in better shape than the market realises

Oscar Oberg: Well share prices have moved a lot and valuations are trading at effectively 20-year lows. Now the question is whether the economy is going to be as bad as what the market thinks it's going to be.

Ally Selby: Will it?

Oscar Oberg: Well, we don't think so. We think savings levels are very, very high. Companies have very, very strong balance sheets. A very different dynamic than what it was in the GFC. It's the point in time to actually invest in the most beaten-up sectors of the market right now that are trading at almost 20-year lows and that's sectors exposed to the domestic economy such as retail, property, building materials and automotive. And we think a lot of companies that we focus on at Wilson Asset Management and small caps actually very well placed to navigate what's going to be a tough environment in 2023.