Fund managers from Rathbones, a provider of investment and wealth management services for private clients, charities and trustees, set out their views for 2023. 

This month, fund managers from Rathbone Unit Trust Management discussed their investment insights for 2023, highlighting the benefits of investing in fixed income, sustainable infrastructure and in UK stocks, while the market remains cheap.

Alexandra Jackson, fund manager, Rathbone UK Opportunities Fund 
We firmly believe that the best chances of success lie in a combination of attractive valuations and earnings resilience. On this basis, the UK scores better than almost anywhere else. UK stocks are cheaper now relative to the rest of the world than since the 1990s; this is the only major developed market trading at levels consistent with a recession. A single-digit P/E multiple has proved a good buying opportunity in the past.

Crucially, many of the pressures that have weighed on our part of the market (mid-caps) are dissipating. Sterling is bouncing, interest rates and inflation are close to peak, and stability has returned to government. Add in a quality screen to avoid accident-prone cyclicals with too much debt, and we can see a path through. The coming recession will further separate the world class from the merely parochial, even though right now valuations are not. While investors are busy searching for the bottom and agonising about a few basis points, someone else will have snapped up these world class businesses trading on a postcode-driven discount. 

Noelle Cazalis, fund manager, Rathbone High Quality Bond Fund      
Yields on offer in fixed income are at multi-year highs. We think it provides an interesting backdrop for the asset class for 2023. The spread widening seen this year, combined with the sell-off in rates, has pushed yields higher. The income investors can draw looks attractive, something that was missing for a few years.   

So far, credit fundamentals of high-quality investment grade companies have been stable. But the market is pricing in default rates for IG, much higher than historical levels. In Europe, the market is pricing in close to a 10 per cent default rate, when the worst it has been since the 1970s is 4 per cent. In our view, this dislocation is likely to correct over the next year, which will be positive for spreads. We believe ‘refinancing risk’ is manageable too for IG companies. Strong fundamentals and attractive valuations lead us to favour credit over government debt. 
 
James Thomson, fund manager, Rathbone Global Opportunities Fund 
Many growth stocks are unlikely to regain their pre-inflation era multiples. So, whilst we will always invest for the long term, that does not mean we should anchor ourselves to stocks dogmatically, when the future and facts change. Rather than burying our heads in the sand and wishing for a drop in inflation to bring back the old status quo, we have made a number of changes to the portfolio over the past year.  

We have changed about 20 per cent of the portfolio in 2022, replacing stocks such as Uber, Shopify, Align, Match, Signature Bank and Silicon Valley Bank, with higher quality growth, more predictable, resilient and cycle-tested companies, where we believe the strong will get stronger over the coming years. Examples include Apple, LVMH, Home Depot, Boston Scientific, Mondelez, Coke and McDonalds. We would never claim that these are unheard of companies but it’s the underestimated potential for revenue and earnings growth; resilience of fundamentals, even in the face of a recession; assessment of growing market share and market penetration, and new addressable market potential that we are assessing to qualify as high quality out-of-favour growth. These companies have been in our ‘watch list’ for many years, so we have used this sell off in markets to buy some of the best growth stocks in the world which we missed first time round.  
 
David Harrison, fund manager, Rathbone Greenbank Global Sustainability Fund 
We believe that the events of 2022 have likely accelerated the move to more sustainable infrastructure. Renewable sources of power continue to represent a significant investment opportunity, coupled with the growing need for energy storage solutions and requirement to invest in next generation grid infrastructure. Similarly, we see increased focus on investment in ageing water infrastructure particularly in the US and Europe, which is likely to remain steady even in a weaker global economy. As supply chains start showing signs of improvements next year, it could prove beneficial for companies exposed to electrification of the global transport fleet which remains an attractive area of investment to us.  
 
Bryn Jones, fund manager, Rathbone Ethical Bond and Rathbone Strategic Bond Funds 
It is difficult to call the overall direction of both rates and gilts for 2023. What we do believe is the extra yield/spread in IG right now compensates investors for the risks of rising rates and/or spread widening. Even with yields rising another 100 basis points from here, we can still generate a positive nominal return. So, we could say spreads tighten or widen, or we could say rates markets will see higher or lower yields, but right now, this is the beauty of IG investing in 2023. The yields on offer look very attractive. Investing in IG credit really plays an interesting part in a balanced portfolio at present.  
 
David Coombs and Will McIntosh-Whyte, fund managers of the Rathbone Multi-Asset Portfolios and the Rathbone Greenbank Multi-Asset Portfolios 
We remain focused on quality businesses with resilient earnings, and companies that are likely to survive a recession and even come out on the other side gaining market share from weaker competitors.  
 
Within fixed income, higher bond yields in 2022 have provided an attractive entry point for both government bonds – which should return to their role as a traditional risk off asset – and corporate bonds where one is now being paid sufficiently for both default and liquidity risk.    
 
With such lack of clarity and visibility, it’s important to stay relatively neutral, balancing participating in any relief rally, as well as taking profits into that strength. We want to make sure we have liquidity to take advantage of future volatility.  2023 will be a challenge but we are close to the end of Fed tightening, probably past peak inflation and with more realism reflected in valuations (not bargain basement), there is room for cautious optimism. Our key is to participate in a recovery as our investors may not thank us if they miss out. 
 
Alan Dobbie and Carl Stick, co-managers of the Rathbone Income Fund 
The UK market remains cheap. How much bad news is priced in? A brief period of relatively stable government combined with a budget seemingly inspired by economic rather than political expediency has steadied UK markets and strengthened sterling. We may hope that this continues into 2023.  
 
The best UK businesses are managing to deal with supply chain issues, rising costs, and labour challenges, as evidenced by the latest round of corporate results. If they can maintain this momentum into next year, there is great value to be had. The UK market is rarely this cheap, and cyclical businesses, notwithstanding economic challenges, are also good value versus defensives. We have been looking at buying selectively into both growth (tend to be niche ideas like Games Workshop, Experian, Dechra Pharmaceuticals, not just broad-brush approach to industry sectors) and cyclicality (cherry picking key industrials like Vesuvius and IMI). But the key is to look at each individual business and ask if they are positioned to deal with their own unique set of challenges and opportunities.  
 
We must look forward with confidence because, for all the bad news, there is the hope that things will slowly improve. Each incremental piece of good news will highlight the value that abounds in the UK market. By paying the right price for any business, whether it offers growth or economic sensitivity, global exposure or domestic, there will always be opportunities.