Blue Monday 2023: which investments could leave you unhappy this ...

Naturally, investors are carefully considering which assets and investment styles will perform best this year – and which could pose further pain. This Blue Monday – said to be the most depressing day of the year – four experts outline the assets and approaches investors should think twice about to avoid being left with the blues.

Steer clear of stretched balance sheets

Chris Elliott, co-manager of the Evenlode Global Equity fund

With the cost of raising external capital increasing, due to higher interest rates and lower equity valuations, companies that cannot self-fund growth are likely to reduce investment during 2023. Such businesses are not confined to a specific sector or geography. 

One red flag we look for is a business model dependent on a debt-fuelled, roll-up acquisitions, where organic investment is eschewed and the balance sheet is stretched. While these businesses can generate returns for investors in the ‘good times’, their additional financial leverage increases their risk in recessionary market conditions. 

We instead focus on asset-light companies with resilient competitive advantages. These businesses are highly cash generative and require little capital reinvestment to maintain their existing operations. This provides them with significant excess cashflow that can be reinvested in advertising and research to drive long-term growth. This often comes at the expense of less profitable peers, that are forced to cut their expenditure in a downturn.

Tread carefully around cyclical sectors

Ken Wotton, co-manager of LF Gresham House UK Multi Cap Income fund

As inflation skyrocketed in 2022, investors had to work harder to find income. Many flocked to oil and mining stocks, where dividends soared, in search of a short-term fix.

This was a very imprudent course of action. These cyclical sectors are prone to volatility, as evidenced by dividend cuts during Covid-19, and the future of fossil fuels is a foregone conclusion.

Instead, investors should look to other areasthat can consistently deliver robust dividends. We target companies in structurally growing sectors, with a competitive advantage providing them with prolonged pricing power. We are confident these businesses will maintain healthy dividends and dividend cover, which will underpin our yield target of 4% over the long term.

Caution required in European and EM equity markets

Ben Gilbert, model portfolio manager at Sarasin & Partners

It has been a ruthless year for asset allocators, with accelerating inflation and its consequences – from interest rate hikes to increased recession risks – triggering an undifferentiated sell-off across all major asset classes. 

Given heightened market turbulence is likely to persist into 2023, it is prudent investors exercise caution, opting for minimal risk exposure and increased weightings towards defensive assets across portfolios.

We remain underweight global, European and emerging market equities. While equity valuations have returned to much more compelling levels in recent weeks, the accelerated tightening of monetary policy across Western economies risks further compression of equity valuations. The expectation global growth will slow materially over the coming years also poses a considerable threat to the outlook for corporate earnings.

Passive investors may struggle

Antoine Denis, head of advisory at Syz Bank

In 2022, we saw that the deteriorating economic cycle created a very challenging investment environment that will probably remain uncertain for a while. Interest rates will likely remain elevated for some time and may even continue to rise if inflation does not slow down rapidly enough. 

We thus believe the current conditions call for the knowledge and experience of active investment managers, as opposed to the use of passive investments. Passive investments greatly benefited from the low interest rate environment and subsequent bull market of the past 13 years, which lent wings to often profitless, speculative ‘concept’ stocks. 

Now volatility is increasing and global markets are finally more adequately pricing risk and money, investors need the clear fundamental framework of an active manager who constantly adjusts selection and exposure to reflect the evolution of prevailing risks. We therefore expect active managers to be better drivers of investors’ returns going forward.