Janus Henderson Outlines Investment Opportunities In 2023

Amanda Cheesley Deputy Editor London 4 January 2023

Janus Henderson Outlines Investment Opportunities In 2023

Portfolio managers at Janus Henderson Investment Trust discuss their market predictions for 2023.

Despite a challenging 12 months, including soaring inflation and the UK officially being in recession, portfolio managers at Janus Henderson Investment Trust believe that there are plenty of things for the investment trust industry to look forward to in the year ahead. 

According to James Henderson, portfolio manager of Henderson Opportunities Trust and Lowland Investment Company, there should "still be plenty of scope for opportunity across the market and in many sectors."

James Henderson
Portfolio manager of Henderson Opportunities Trust and Lowland Investment Company

As we look into 2023, there are a number of things we will be watching closely. Interest rates will dominate much of the thinking as investors seek to establish how far rates will go up in order to discount the extent of the slowdown. At the stock level, the all-important theme will be cost control, as we watch to see whether wage rises will be contaminated, whether raw material prices come down and whether companies are able to push prices up to keep their margins. And crucially, we will be waiting for signs of economic recovery which, when it comes, should fuel rapid earnings growth.
Within this context, there should still be plenty of scope for opportunity across the market and in many sectors. Companies with excellent management tend to come through slowdowns stronger – by keeping their costs under control and then reaping the benefits when demand picks up – whilst the weaker players disappear. One sector that we will continue to look at throughout the next 12 months is manufacturing. The UK’s manufacturing sector is very competitive as a result of both self-help and the depreciation of sterling in recent years. As an industry, it is well-disciplined and well-prepared to deal with difficult environments. Both HOT and Lowland have good exposure to industrials, with holdings such as TT Electronics and Morgan Advanced Materials.
David Smith
Portfolio manager of Henderson High Income Trust

In the Bank of England’s own words, the outlook for the UK economy is “very challenging.” Inflation is the highest for 40 years, mortgage rates have spiked, interest rates are rising, there is an energy crisis caused by a war in Europe and the UK economy is about to enter recession.
However, we must remember that equity markets are discounting mechanisms and although the FTSE All-Share has been relatively resilient this year, especially compared with overseas indices, there has been a significant divergence in performances within the market. The largest companies in the UK market have performed well, such as those in oil and gas, mining, tobacco and defence sectors, while smaller more cyclical companies have fallen significantly. Valuations in this part of the market are starting to look very attractive on a long-term view. While in the short term there could be further downside to equities as profit forecasts are adjusted downwards to reflect the weakening economy, it feels that markets may be closer to the end of the bear market rather than the beginning, especially if inflation and interest rates are close to peaking.
Throughout the year the Trust has lowered gearing and increased the bond exposure while the equity portfolio has maintained a bias towards defensive and more resilient businesses. More recently, however, the cyclical exposure has slowly been increased, buying high-quality businesses or where the valuation appears to be already discounting a too bearish economic outcome. While the outlook is uncertain, the Trust is more focused on finding further opportunities in cyclicals where valuations are particularly compelling, remembering that share prices historically trough before economies do.

Neil Hermon
Portfolio manager of The Henderson Smaller Companies Investment Trust

2022 has been an extremely difficult year for equity markets especially UK mid- and small caps. The reasons for this are well known and include slower economic growth in China, the conflict in Ukraine, rapid escalating inflation and the pressure this is putting on consumer spending, the hawkish shift by central banks towards higher interest rates and the move from quantitative easing to tightening and more recently political turmoil in the UK.
Looking into 2023, although macro-economic conditions remain difficult and likely to become more challenging, there are reasons to be positive. Although corporate earnings are likely to be under pressure valuations have compressed significantly. The UK market looks cheap under almost any measure compared with history and other international markets. Corporate earnings performance remains robust and importantly balance sheets are strong with generally low leverage prevalent. Indeed over half our portfolio by value have balance sheets with net cash. Corporate confidence in their own future is evidenced by rising dividends and a number of companies buying back their own equity. Additionally, we continue to see inward M&A transactions from overseas and private equity players.

A number of potential catalysts could help the equity market recover. The first would be a relaxation of the Chinese zero tolerance policy to Covid. Secondly, any resolution to the conflict in Ukraine would be very positive for sentiment and would significantly help decrease inflation as oil and gas prices would likely reduce. However, there seems to be little progress in this regard. More importantly the market needs clarity on the likely peak in inflation and interest rates, an area where there has been a fairly constant level of disappointment throughout 2022. However, there are signs that we are approaching the peak in both these measures. This will allow the equity market to look ahead with more certainty and allow a more considered perspective on equity valuations.

Jamie Ross
Portfolio manager of Henderson Eurotrust

2022 has been a very difficult year for European equities and, in particular, for the more growth/quality end of the market. Interest rates and inflation expectations have risen sharply, whilst geopolitical concern has been a near constant. Value has been the place to be, more specifically defensive value. We have underperformed the market.
Heading into 2023, we are starting to see a more balanced debate emerge on the likely future direction of monetary policy and on the sustainability of heightened inflation. Coupled with this, equity markets are inexpensive and, unless we see significant earnings downgrades over the next 12 months, such low equity market valuations are unlikely to be sustainable. A final observation is that according to survey data, European equities are deeply out of favour with international investors.
So what does this mean for 2023? In summary, after a tricky 12 months, we have cheap and out of favour European equities and a more balanced debate between growth and value positioning. The first of these factors leaves me confident that European equity markets can have a positive year. The second of these factors is more difficult to interpret. However, I am hopeful of a more balanced market, less driven by style (growth versus value) factors and more driven by stock-specific performance. In a more positive environment, one may expect a recovery in areas such as consumer discretionary, information technology and industrials.

Mike Kerley
Portfolio manager of Henderson Far East Income Trust

The key things to look for in the first half of 2023 are the possible peak in US interest rates as the economy weakens and the potential for a change in the Chinese policy towards Covid and a greater focus on economic stimulus. Both of these events would be a positive for the Asia-Pacific region leading to a weaker US dollar and an improvement in regional trade.

Following the regions underperformance, valuations look compelling both compared with its own history and global peers. Opportunities exist across most markets with North Asia and especially China looking particularly attractive. The one exception is India where valuations are at multi-decade highs.

Although we expect the first half of 2023 to be volatile as markets digest data releases, there are three key themes that are represented in the portfolio. Firstly, we believe that energy and materials prices will be higher for longer as new areas of demand and a lack of new supply will keep prices elevated. Secondly, we fully expect China to show a strong recovery in 2023, although we expect this to be back-end loaded. In the portfolio this is reflected in the high materials weighting but also in the selective addition of stocks exposed to a recovery in consumption. Finally, we continue to like the communications services sector for its stable cash flow generation and dividend yield.

The biggest risks are an unsuccessful re-opening in China, heightened geopolitical risks or a global financial mishap that tightens liquidity and restricts flows to the region.

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