China, Infrastructure and 3 More Investing Themes for 2023

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‘The 2022 downturn has set the stage for a much improved long-term investing environment,’ Morningstar said.

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Sharp declines in stocks and bonds made 2022 a difficult year for investors, but those moves have also created opportunities.

“The 2022 downturn has set the stage for a much improved long-term investing environment,” Philip Straehl, global head of research at Morningstar Investment Management, said in a commentary from the firm.

Morningstar cites five investing themes for 2023.

1. Return of the Stock Pickers

“Will 2023 finally be the year where stock-picking matters more than broad market performance?” wrote the report’s author, Morningstar columnist Sandy Ward.

“Some strategists say that with the markets expected to remain volatile and overall returns likely to be low, the time could finally be right for active management to have a positive impact on a portfolio.”

Stock-picking opportunities “may transcend the usual categorizations of value and growth or particular industries and instead be rooted in companies with effective operations and healthy balance sheets,” said Maria Vassalou of Goldman Sachs Asset Management, as cited by Morningstar.

2. Time to Invest in Bonds

“For bond investors, 2022 was the worst year in history, but now they’re back,” Ward wrote.

Bonds haven’t presented such a juicy buying opportunity since 2008-2009, said Morningstar’s Straehl. The 10-year Treasury yield soared 2.37 percentage points last year and recently stood at 3.79%. Other yields jumped as well.

The higher rates provide “meaningfully positive total-return prospects after inflation — following an extended period of not keeping up with consumer prices,” Straehl said.

Treasurys, corporate bonds and Treasury Inflation-Protected Securities, known as TIPS, look especially good for their improved risk/reward profile, he said.

3. A Potential China-Reopening Play

“The reopening of the world’s second-biggest economy, as its leadership eases restrictions after three years of zero-covid lockdowns, could give a tremendous boost to the country’s domestic growth and to economies worldwide,” Ward said.

That may happen “as factories reopen, supply chains unsnarl, and Chinese consumers begin to spend more,” she said.

“China, after a hesitant start, will likely see much improved economic growth in 2023, while most of the world will be sluggish,” said John Vail, chief global strategist at Nikko Asset Management, as cited by Morningstar.

4. Bridging Into Infrastructure Stocks

“The pandemic and its after-effects laid bare shortcomings in infrastructure around the globe,” Ward said.

“Russia’s war against Ukraine highlighted national-security vulnerabilities in the energy sphere, and China’s lockdowns disrupted the flow of vital technologies.”

Meanwhile, “the major push to transition from traditional energy sources to renewables is another big driver of the interest in infrastructure assets,” Ward said.

“New infrastructure projects will be at the center of efforts to create self-sufficiency in key areas such as increasing energy capacity in the U.S. and Europe, improving transportation and trade routes.”

5. Emerging Markets for Added Diversification

“The buzziest of all asset classes [now] is emerging markets,” Ward said. “It’s hard to find an investment manager not recommending some exposure to the group.”

While U.S. stocks have cheapened after last year’s fall, bigger bargains can be found overseas, especially in emerging markets, Straehl said.

He sees emerging-market stocks delivering inflation-adjusted annual returns of about 7% in the next decade. And he upgraded Morningstar’s conviction level on the asset class to “medium to high.”

Vanguard’s Investment Strategy Group sees emerging-market equities as an “important diversifier in equity portfolios,” Morningstar reports.

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