China, Infrastructure, and 3 More Investing Themes for 2023

According to Morningstar, the 2022 slump has created a significantly better long-term investing environment.

2022 was a challenging year for investors due to the sharp drops in stocks and bonds, but these changes also brought about possibilities.

According to Philip Straehl, worldwide head of research at Morningstar Investment Management, “the 2022 slump has laid the ground for a considerably improved long-term investing environment.”

Five investment topics are listed by Morningstar for 2023

1. Return of the Stock Pickers

Will 2023 signal the year when stock selection becomes more important than overall market performance? Sandy Ward, a Morningstar columnist, wrote the report

“Some strategists claim that the time may have finally come for active management to have a positive impact on a portfolio, with the markets projected to stay volatile and total returns likely to be low.”

According to Maria Vassalou of Goldman Sachs Asset Management, as cited by Morningstar, stock picking chances “may transcend the typical categorizations of value and growth or particular industries and instead be centered in companies with effective operations and solid balance sheets.”

2. Time to Invest in Bonds

The worst year ever for bond investors was 2022, but they’re back now, according to Ward.

Since 2008 or 2009, bonds haven’t offered such a lucrative buying opportunity, according to Morningstar’s Strahl. Last year, the 10-year Treasury yield increased by 2.37 percentage points, and it is at 3.79%. As well, as other yields increased.

After a prolonged time of not keeping up with consumer prices, the higher rates offer “meaningfully good total-return prospects after inflation,” Strahl said.

Due to their improved risk-to-reward ratio, he said Treasurys, corporate bonds, and Treasury Inflation-Protected Securities, or TIPS, appear particularly appealing.

3. A Potential China-Reopening Play

“The reopening of the second-largest economy in the world, as its government eases restrictions after three years of zero-covid lockdowns, could provide the country’s internal growth and economies around the world an enormous boost,” Ward said.

As “factories reopen, supply chains unsnarl, and Chinese consumers begin to spend more,” she said, that might take place.

According to Morningstar, John Vail, chief global strategist at Nikko Asset Management, “China will likely have considerably improved economic growth in 2023, while rest of the world will be slow.”

4. Bridging Into Infrastructure Stocks

According to Ward, “the pandemic and its consequences exposed flaws in infrastructure all around the world.”

The conflict between Russia and Ukraine “highlighted energy-related national security weaknesses, while China’s lockdowns hindered the supply of essential technologies.”

The desire to switch from conventional to renewable energy sources, according to Ward, is a major factor in the demand for infrastructure assets.

“New infrastructure projects will be at the heart of attempts to promote self-sufficiency in important sectors, such as boosting transportation and commerce routes, increasing energy capacity in the U.S. and Europe.”

5. Emerging Markets for Added Diversification

The most talked-about asset class right now, according to Ward, is emerging markets. It’s difficult to find an investment manager who doesn’t advise exposing some assets to the group.

After falling last year, U.S. stocks have become more affordable, but deeper discounts can be found elsewhere, particularly in emerging markets, according to Strahl.

In the following ten years, he expects emerging-market stocks to produce annual returns that are roughly 7% after accounting for inflation. He also increased Morningstar’s level of conviction for the asset class to “medium to high.”

According to Morningstar, Vanguard’s Investment Strategy Group views emerging-market stocks as an “essential diversifier in equity portfolios.”

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