It’s easy to focus on what could go wrong in markets and the economy this year given the current landscape – but what if we flipped the script and highlighted what could go right in 2023?
We reached out to our research analysts to get their insights. Let’s hear what they had to say.
Sector: Tech
Many companies within the tech sector have undertaken meaningful cost cutting initiatives, shifting focus from growth to efficiency in an effort to preserve margins – and to simply become leaner and more flexible given increased macro uncertainty. This may very well set the stage for some dramatic operating leverage and earnings growth on the other side of this cycle.
While the shape and the duration of the current cycle is an unknown, we think some industries within tech have already taken their medicine, so to speak. eCommerce and gaming, for example, have essentially been in a recession for the past 18 months as economies have reopened and consumer habits have shifted. Going forward, many of these companies will be overcoming very weak comparable periods and growth may very well accelerate, even in a weakening economy. Rates of change matter, especially for tech companies, and we would expect investors to react favorably to accelerating growth.
There are also numerous pockets within the tech sector that are ripe for consolidation. Industries that will likely exhibit ongoing consolidation include online security, collaboration software, ride-sharing, food delivery, as well as others.
Artificial Intelligence is another area to monitor. The enthusiasm around ChatGPT and OpenAI appears to be spurring a Sputnik-like moment for big tech companies in the sense that we are seeing an AI arms race. This is very bullish for our investments in the semiconductor industry and related supply chain.
Equally as bullish is the ongoing move toward supply chain localization. The geopolitical tension between China and Taiwan has led governments to push for the on-shoring of manufacturing for sensitive technologies. Billions of dollars of incentives are being granted, which is bullish for our investments in semiconductor capital equipment providers, and also for the semiconductor industry in general in terms of the implications on manufacturing costs.
To the extent investors start to account for slowing inflation and an eventual Fed pause, we would expect tech to see a positive re-rating, particularly for higher growth tech companies.
Jake Boak, Senior Equity Research Analyst
Sector: Life Sciences/Healthcare
In healthcare, we continue to find investment opportunities in a difficult macro environment driven by two key factors, which the market will increasingly reward:
- Meaningful innovation
- Individual stock-picking
Innovation in healthcare tends to occur slowly. However, in recent years, technological advancements (lower cost of genetic sequencing, more sophisticated computing abilities) and market forces (increased cost sensitivity) have driven an acceleration in pace. We are seeing more opportunities where companies (large and small) drive sustainable and impactful improvements in cost, quality, and/or access to care. Whether it be in drug discovery, new care delivery/reimbursement models, or new devices to treat, prevent, or even cure diseases, we believe the market will increasingly reward companies that drive these innovations into sustainable and profitable business models – thereby rewarding both society and shareholders.
With a new interest rate paradigm emerging across the economy, we believe markets will increasingly reward individual stock picking. Higher rates and lower liquidity ultimately translate to a greater disparity between companies that fundamentally improve their business performance versus those that just drive revenue growth with little regard to profitability. They will also likely create greater disparities in stock performance between companies successful in driving change compared to those that are not. This environment would reward diligent investors that can successfully sift through the investment universe to find these opportunities. This environment is ideally suited for application of our well-defined, repeatable, and time-tested investment strategies and should also enhance the impact of the approach we discussed in the previous point.
Sahil Bhatia, Equity Research Analyst
Sector: Capital Goods
In light of our top-down macro expectations for a meaningful downturn this year, what could go right for us in our sector would be for the macro call to play out directionally as expected and for cyclical sectors to underperform – as they do in recessions and downturns. This will give us an opportunity to increase our exposure to pro-cyclical stocks, which tend to outperform coming out of recessions and downturns.
In addition, there are few secular themes that could aid performance through a downturn for specific areas of our coverage. One theme is automation and the increasing investments being made to automate everything from warehouses and supply chains to manufacturing and processing industries. The second theme is the reshoring/deglobalization of manufacturing and supply chains, which is in the very early innings, and could provide a higher floor under cyclical areas of our coverage in a downturn. And finally, there are the ongoing trends in clean energy which continue to make inroads, which tend to be very difficult areas for us to invest in due to high reliance on government subsidization to achieve economic viability, though we continue to monitor this space.
Beth Mallette, Managing Director of Capital Goods Group
Sector: Fixed Income
What could go right for fixed income? If the US enters a traditional disinflationary recession, US Treasuries will act as the ballast in a storm of risk assets selling off as financial conditions tighten. The traditional Pavlovian response by investors to buy safe, long duration assets, like US Treasury bonds, will help the bond market outperform as yields should decline materially from multi-decade levels. Fixed income markets will also do well if the Federal Reserve achieves the “immaculate tightening” by guiding the economy to a “soft landing” after 18-months of running the economy hot. This scenario implies demand and supply come back into balance, pushing inflation back down to the Federal Reserve’s 2% target without generating significant slack in labor markets. On top of what investors will earn from the higher starting point for yields this year, we see scope for modestly lower yields in a soft-landing scenario, led by the belly of the curve.
The one corollary for both scenarios? Lower inflation.
Brad Cronister, Fixed Income Research Analyst
The markets and economy can be bewildering, with no crystal ball to see into the future, no one knows exactly what the year will bring. All we can do it stick to our processes, be tactical and calculated, and prepare to take advantage of opportunities as they present themselves.
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This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.
