Best investments to watch in 2023

With tough financial times ahead and a possible recession due, 2023 won’t be an easy year for investors. Companies are facing rampant input cost price inflation, which is at a 40-year high, higher energy costs and rising interest rates, as well as continued disruption due to war in the Ukraine.

As such, in our list of the best investments to watch in 2023 we have put together a mixture of defensive and recovery plays to balance risk and the possibility of recovery and growth in other areas, such as technology and renewable energy.

1. Infrastructure
2. Top dividend payers
3. Cybersecurity
4. Artificial intelligence
5. Renewable energy
6. Autonomous and electric vehicles
7. Defence
8. Utilities
9. Healthcare
10. Small caps

Infrastructure

While we may be entering a recession next year in much of the West, major spending continues on infrastructure projects around the world. In recent years, the US and UK governments have both approved large-scale building and construction programmes and the global infrastructure market was estimated to be worth $2,242 billion in 2021, according to Mordor Intelligence, and forecast to reach $3,267 billion in 2027.

A good way to access this trend, rather than buying individual shares, is to buy an exchange-traded fund, such as the Alerian Infrastructure ETF. These invest in a pool of different company shares and spread risk.

Worth $493 billion, the ETF invests in 30 infrastructure companies, buying into what it describes as the North American ‘energy renaissance’. Tracking the Alerian Midstream Energy Select Index, it invests in assets such as major pipelines and energy providers in North America, seeking to grow both capital and income. Its top 10 holdings include Canadian offshore wind provider Enbridge, Enterprise Product Partners, a Texas-based midstream crude oil and natural gas supplier, and Energy Transfer LP.

The expense ratio is 0.4% and the fund delivered an annualised return of 7.9% over one year, 6.3% over three years and 8% over five years. Over the year to date, it is up 8.9% but down 10.4% over the past six months.

Top dividend payers

In tough times, cash is king and reliable dividend income can be vital. Investing in a dividends-focused ETF is a good way to approach this. The iShares UK Dividend UCITS ETF invests in 50 UK listed companies with leading dividend yields, offering diversified exposure to UK companies in the higher yielding sub-set of the FTSE 350 index.

Some of its top 10 holdings include Rio Tinto, Anglo American, Imperial Brands, Persimmon and Vodafone. The fund has delivered cumulative returns of 62.7% over 10 years, 9.6% over five years, 7% over three years and 4% over one year. However, its performance over the past six months has been disappointing, down 4.6%. The expense ratio is 0.4%.

Cybersecurity

The international market for cyber security was worth $150.37 billion in 2021, according to Mordor Intelligence, and is expected to double to $317.02 billion by 2027. One way to access this theme is through the L&G Cyber Security UCITS ETF.

This ETF tracks the ISE Cyber Security UCITS Index, investing in 45 cyber security stocks. Its managers say that the sector is a “mega-trend that is radically transforming the way we live and work.” The fund targets infrastructure providers, developing hardware and software for safeguarding files, websites and networks, and service providers supplying consulting and secure cyber-based services.

The top 10 holdings include Anglo-American cyber defence firm Darktrace, network security specialist Juniper Networks, networking giant Cisco Systems and cloud security provider Akamai Technologies.

Geographically, the ETF is 71.8% invested in the US, with 11.3% in Israel, 5.6% in the UK and 4.8% in Japan. The fund has delivered an annualised return of 11.3% over five years and 7% over three years. However, over one year it is down by 27.7% due to lack of investor appetite for technology stocks.

Bear in mind that L&G rates the fund as a ‘6’ out of 7 in its risk profile, with 1 being the lowest risk and 7 the highest. The ongoing charge is 0.69%.

Investing in megatrends stocks can be high risk. Only invest money you can afford to lose.

Artificial intelligence

Artificial intelligence is a high risk but growing market and will be a key investment theme over the next decade, covering everything from Amazon’s Alexa to advanced robotics and more workaday areas, such as online shopping. The sector was valued at $27.2 billion in 2019, but is forecast by Fortune Business Insights to grow almost tenfold to $266.9 billion by 2027.

Investors looking for a diversified way into this theme could invest in the Wisdom Tree Artificial Intelligence UCITS ETF. This tracks the holdings and performance of the NASDAQ CTA Artificial Intelligence Index.

Run by Irish Life Investment Managers, its top 10 holdings include Pros Holdings, a Texas-based artificial intelligence firm whose software enhances shopping transactions, Cadence Design Systems, a leader in electronic systems design, cyber security provider SentinelOne Inc and Workday, which provides cloud-based human resources software.

The bulk of the fund (91%) is invested in the information technology sector, with 2.43% in consumer discretionary and 2.37% in financials, while geographically, it is 61% allocated in the US, 13.4% in Taiwan and 4.9% in Japan.

The fund is ISA eligible and the total expense ratio is 0.4%. Since inception, the fund has delivered a return of 37% and 10.4% over three years. However, it has lost 37.9% over the past year due to the fall in technology stocks.

Autonomous and electric vehicles

Electric vehicles (EVs) form a major part of the greenification of transport across the world. The European Union is to ban the sale of new petrol and diesel vehicles by 2035, while earlier this year California introduced similar legislation. One pooled way to access this trend is via the Global X Autonomous and Electric Vehicles ETF, which seeks to replicate the Solactive Autonomous and Electric Vehicles Index.

Worth just under $1 billion, the fund invests in companies working in different areas of the autonomous vehicle and EV space, including makers of EVs, lithium battery producers and producers of cobalt and lithium.

According to its managers, global EV sales increased by 40% in 2020 but still make up just 5% of vehicle sales. Meanwhile, experts think autonomous vehicles could enhance road safety.

The ETF currently has 76 holdings and among its top 10 are Tesla, Nvidia, which makes specialist chips, Apple, Intel, Alphabet – owner of Google’s owner – and Pilbara Minerals, based in Australia, as well as Toyota and Ford. It has an expense ratio of 0.68% and has delivered a cumulative return of 60.1% since inception in 2018 and 6.7% over 2 years. However, over one year it is down by 24% due to the rout in tech stocks.

Renewable energy

According to research by Allied Market Research, the global green technology and sustainability market size was valued at $10.32 billion in 2020. It is forecast to hit $74.64 billion by 2030, growing at a compound annual growth rate of 21.9% from 2021 to 2030.

The Lyxor MSCI New Energy ESG Filtered (DR) UCITS ETF invests in global companies operating in the clean energy sector. Valued at €1.4 billion, it tracks the MSCI ACWI IMI New Energy ESG Filtered index.

The fund has generated returns of 75.8% over five years and 48.5% over three years; however, it is down by 18% over one year.

Utilities

Utilities can be a good defensive sector to invest in when economic times are tough. This is because energy company revenues tend to be relatively reliable, as are their dividend payments. It may also be a good way to benefit from the current high electricity prices in the UK and Europe, although it’s always a possibility that companies could be hit by windfall taxes.

The SPDR MSCI Europe Utilities UCITS ETF tracks large and medium-sized companies in the European utilities sector, using as its benchmark the MSCI European Utilities 35/20 Capped Index. Run by State Street Global Advisors, the fund has delivered a return of 7.8% over five years, 5.6% over three years and is down 1.25% over one year.

Its top ten stock holdings include Iberdrola, National Grid, Enel, RWE and SSE. Currently the fund is 54% invested in the electricity sector, 27.5% in multi-utilities and 9% in renewables. The ETF has a total expense ratio of 0.16% and 25 holdings.

Defence

With the continued conflict in the Ukraine, following the invasion by Russia earlier this year, and tensions over Taiwan, many Western governments are increasing their defence spending. The defence sector is also another area which is typically a safe haven in a recession. Indeed, shares in defence contract BAE Systems have risen by 34% this year as investors have bought into the stock.

Rather than buying individual shares, purchasing an ETF offers a pooled approach into the sector. The Invesco Aerospace and Defence ETF tracks the SPADE Defense Index, which invests in companies involved in the manufacture and support of US defence, aerospace and homeland security operations.

Its top 10 holdings include aircraft manufacturers Boeing, Northrup Grumman and Lockheed Martin, missile defence system producer Raytheon Technologies and General Electric. The expense ratio is slightly pricier than other ETFs at 0.58%, while the performance is mixed, up 5.6% over five years, down 0.67% over three years and down 9% over one year.

Healthcare

The healthcare sector offers defensive qualities for investors when times are tough. This is because demand for healthcare services and medicines tends to continue, regardless of the state of the economy. Plus, while major drug companies may be hit by higher cost input inflation, they usually retain strong pricing power for their medicines.

One way to access this trend is via an ETF. The iShares Global Healthcare ETF is run by Blackrock and follows the S&P 1200 healthcare index. Worth $4.3 billion, it invests in a range of medical device, pharmaceutical and healthcare companies and has 114 holdings.

Among its top 10 holdings are UnitedHealth, Pfizer, Eli Lilly, AstraZeneca, Johnson & Johnson and Novartis. Currently it is 64.6% invested in pharma, biotech and life sciences and 33.3% in healthcare equipment and services. Over five years the fund has delivered a return of 7.64% and, over three years, 8.69%. However, it is down 8.86% over one year and down 2.7% in the year to date. The expense ratio is 0.4%.

Small caps

Smaller companies can be considered a risky investment as the share prices tend to be more volatile and reactive to news flow and the machinations of the stock market. However, they also tend to have greater growth potential than larger companies, historically delivering greater returns over the longer term. Although a recession is expected next year, small cap firm shares could benefit once any stock market recovery takes hold.

The WisdomTree Europe SmallCap Dividend UCITS ETF tracks the price and yield performance, before fees and expenses, of the WisdomTree Europe SmallCap Dividend UCITS Index Euro. It seeks to invest in high quality dividend-paying firms based in the Eurozone region. Some of its top 10 holdings include Nordic steel producer SSAB, utility provider Telecom Plus, Danish shipping company D/S Norden and UK investment management firm Quilter.

Since its inception in 2014, it has delivered a return of 7.87% and 3.57% over three years, although it is down 8.6% over one year due to the wider stock market falls. The expense ratio is 0.38% and the fund is ISA eligible.

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