Global markets 2023: Investment prospects for US, China and overseas funds to watch


War in Ukraine: Russian invasion upended markets

The US drive to curb inflation with aggressive rate hikes is reverberating across world markets.

The progress of the Federal Reserve’s tightening policy, and when it will begin to ease off again, is therefore under close scrutiny.

The war in Ukraine, which unfortunately may intensify next year, and China’s battle against Covid will also help to determine the severity of a global recession.

We look at how events might unfold in the world’s major markets in the year ahead, and financial experts tip 21 funds and trusts for 2023 below.

Global markets: US more successful in fighting inflation than Europe

The past year saw the revenge of things that had seemingly been consigned to history, like fossil fuels and inflation, says Shore Financial Planning’s investment director Ben Yearsley.

‘For the first time since 2019 the main story wasn’t Covid, even if China is still gripped by the virus, but clearly Russia’s invasion of Ukraine.

‘Oil, gas, soft commodities – all impacted by Russia, all major influences on inflation, and all largely immune to central bank action on fighting inflation.

‘I should say European inflation, as the US is far less exposed to these inputs being much more self sufficient – in other words the Fed will probably be more successful in its inflation battle.’

But Yearsley notes oil is currently well off the highs seen earlier this year, at around $78 a barrel compared to over $120, and at this rate deflation could be an issue next year.

He says global markets have de-rated, but in some cases still look expensive. And meanwhile, the ‘Fed Pivot’ – the US Federal Reserve ending its recent run of interest rate hikes – is now the thing many are awaiting.

‘Yet even if it comes in the first half of next year will it really tempt investors back into high growth go-go stocks?’ asks Yearsley.

‘The days of loss-making companies on sky high multiples is over for the foreseeable future. That doesn’t mean you can’t make money from these levels, just that you shouldn’t anchor on what the price was.

‘Old economy stocks have been the place to be invested this year, energy especially. I’m not sure whether that story will run out of steam, but it’s rare for the same sectors to drive markets in consecutive years.’

The US: Investors ignore the tech giants at their peril 

The normally rampant US markets racked up sizeable losses last year, although the impact was mitigated for UK investors who benefited from the strong dollar.

The significant strengthening of the US dollar against all other major currencies including the pound was an important trend for most of 2022, according to Bestinvest managing director Jason Hollands.

It occurred because the dollar is seen as a safe-haven currency and the US Federal Reserve raised interest rates at a much more aggressive pace than other major central banks, he explains.

‘While the strong dollar has been unhelpful to most other economies, acting as an additional inflationary pressure in respect of imports priced in dollars, such as oil, there has at least been a silver lining for UK investors.

US Federal Reserve: Battle to control inflation has led to aggressive rate hikes, with significant knock-on effects around the world

US Federal Reserve: Battle to control inflation has led to aggressive rate hikes, with significant knock-on effects around the world

‘Inadvertent currency gains made by those holding US or global investment funds have masked the depth of underlying losses made on their US investments.’

But he warns the strong dollar trend started to unwind in October, meaning potential currency losses instead of gains for UK investors in the US.

And Hollands adds: ‘The US market has a sizeable skew towards “growth” sectors and could remain vulnerable given the sensitivity of such companies to higher interest rates and a deteriorating outlook for the economy.’

Richard Hunter, head of markets at Interactive Investor, says: ‘Arguably the most prevalent concern this year has been whether the Federal Reserve’s aggressive rate hiking policy will tip the world’s largest economy into recession.

‘This will remain the nub of the matter, particularly in the earlier parts of the year and will set the sentiment scene depending on the outcome.

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‘At present, it is also unclear whether earnings valuations are up to date with reality, especially in the event of an economic downturn.

‘As such, quarterly updates and outlook comments from the companies on the ground will assume extra significance.’

Regarding the Nasdaq tech index, which collapsed in value in 2022, Hunter says: ‘This year’s steep losses were exacerbated by the rotation from growth to value stocks, but much quality remains.

‘Indeed, it may also be fair to say that investors ignore the tech giants at their peril, since there is plenty of scope for further growth.

‘Many of them have dominant, and in some cases, unassailable positions in their market and are prime examples of what Warren Buffett would describe as having a “moat” around the business, namely a competitive advantage which allows the company to maintain both pricing power and higher profit margins.’ 

China: End of ‘Zero Covid’ policy could bring a major economic boost 

The re-opening of China after the pandemic will be an important development to look out for in 2023, says Ben Yearsley of Shore Financial Planning.

‘Zero Covid is finally being abandoned in the face of widespread protests due to economic damage. Noises have already been made about a change in policy.

‘Unsurprisingly Chinese equities have started rebounding but still remain cheap. Stimulus will come which will filter into markets and wider Asian equities. Despite the politics, I’m a buyer.’

Janet Mui, head of market analysis at RBC Brewin Dolphin, says: ‘There are more concrete signs that the Chinese government is softening its stance after widespread protests.

‘We think the overall direction remains constructive, where the worst of Zero Covid restrictions are behind us. The normalisation of Chinese activity will be incrementally positive for global demand, at a time when recession looms in 2023.’

Zero Covid: Chinese government is softening its stance after protests

Zero Covid: Chinese government is softening its stance after protests 

Mui says investors will remain very sensitive to Covid developments in China because there is a general sense of ‘Fomo’ – fear of missing out – in case there is a big rally.

But she warns there are challenges and complexities involved in the reopening process, and adds: ‘Over the longer-term, investors are likely to remain concerned about the political, geopolitical, and regulatory implications after the cabinet reshuffle by President Xi at the National Party Congress.’

Jason Hollands of Bestinvest says: ‘If there is a wildcard performer next year, it could be emerging market equities which have been held back by the poor performance of Chinese equities over the last two years.

‘Recent moves by Chinese authorities to ease their draconian “Zero Covid” strategy of lockdowns in the face of mass protests could lead to a sharp rebound in economic activity aided by much looser monetary policy in China than the rest of the world.

‘However, with relative low vaccination rates and less effective domestic vaccines, there is also a real risk of a major flare up of Covid too, so there are risks as well as opportunities here.’

Overseas investment funds and trusts to watch 

Experts tip the investments worth a look in 2023.

Kate Marshall, lead investment analyst, Hargreaves Lansdown

Pyrford Global Total Return (Ongoing charge: 0.64 per cent)

The team behind this fund have three key aims, says Marshall – not to lose money over a 12-month period, to deliver an inflation-beating return over the long term, and to do this with low volatility.

‘Inflation is running high, which makes it a tough hurdle to beat in the short term. Even tougher when both stock and bond markets, where the fund is focused, are so turbulent.

‘We think the team at Pyrford could beat inflation over the longer term, and in the meantime could provide an element of shelter compared with many other funds.’

What is an ongoing charge? 

The ongoing charge is the investing industry’s standard measure of fund running costs.

The bigger it is, the costlier the fund is to run.

The ongoing charge figure can be found in the Key Investor Information Document (KIID) for any fund, usually at the top left of page two.

To track down these documents, put the fund name and ‘KIID’ together in an internet search engine. 

Marshall says the team invests flexibly but focuses on a mix of shares, government bonds and cash, with the latter two assets expected to perform differently and bring some stability to the fund.

Schroder Managed Balanced (Ongoing charge: 0.98 per cent)

This fund also invests in a mix of investments, including global shares and bonds, and is in the IA Mixed Investment 40-85 per cent Shares sector, says Marshall.

It is a ‘fund of funds’, and tends to invest more in company shares than total return funds do.

‘The managers primarily invest in funds run by other talented Schroders fund managers, although they can also invest outside of the Schroders range where necessary,’ says Marshall.

‘Collectively, those managers invest in hundreds of different companies and bonds. This means the portfolio offers plenty of diversification.’

She says Schroders’ asset allocation team tend to favour shares when the economic environment is positive, and shift to more diversified assets such as bonds and cash – aiming to minimise losses – in times of stress.

M&G Global Macro Bond (Ongoing charge: 0.63 per cent)

‘Different bond funds use different investment styles, and some take a more defensive approach that could provide some ballast in turbulent markets,’ says Marshall.

‘Jim Leaviss, this fund’s manager, starts with his “bigger picture” macroeconomic outlook, forming a view on economic growth, interest rates and inflation globally.

‘He then has the freedom to invest in different types of bonds, issued in different currencies to generate a combination of income and growth over the long term.’

Marshall says Leaviss is one of the most experienced bond fund managers in the UK, and invests across global government bonds, investment grade corporate bonds, and higher-risk high yield and emerging market bonds.

‘The fund may invest more than 35 per cent in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s prospectus. The manager’s freedom to buy bonds issued in different currencies means movements in currency exchange rates can add or detract value.’

Legal & General International Index (Ongoing charge: 0.13 per cent)

This fund tracks the performance of a range of global markets, as measured by the FTSE World ex UK Index, and is currently made up of around 2,200 companies so offers plenty of diversification, says Marshall.

‘The fund is focused on sectors such as technology, financials, and consumer-related sectors, though the makeup of the index can change over time.

‘It’s heavily weighted in US companies which make up around two thirds of the fund. This is determined by the underlying index the fund is tracking. Other countries and regions represented in the fund include Japan, Canada, Europe, Australia, and Taiwan – but not the UK.’

Marshall notes that Legal & General has been running index tracker funds for over 30 years and is one of the largest providers, which means it has resources and expertise to track indices as closely as possible and is big enough to keep charges down.

‘It proactively engages with businesses and uses proxy voting rights to highlight important matters like environmental, social and governance issues,’ she adds.

Darius McDermott, managing director of FundCalibre

Aberdeen Standard SICAV I Global Mid Cap Equity (Ongoing charge: 0.99 per cent)

‘This fund is an extension of abrdn’s successful small and mid-cap desk and targets the ‘next 15 per cent’ in market cap size up from smaller companies,’ says McDermott.

‘It is run by Anjli Shah and the process is based around abrdn’s powerful screening tool, “Matrix”‘.

‘Despite a market-cap and style headwind for the past 12-18 months, the fund has so far returned a respectable 31 per cent for investors versus an average 36.6 per cent for the IA Global sector average.’

Polar Capital Global Insurance (Ongoing charge: 0.85 per cent)

‘Everything around us is insured, regardless of economic boom or bust, which provides this fund with very good defensive characteristics,’ says McDermott.

‘The fund has been co-managed by Nick Martin since 2008 and he took on full responsibilities in 2016. It’s consistent track record offers a good return profile for portfolio diversification.’

He adds: ‘The fund returned an impressive 20.2 per cent in 2022 and it was the best performing fund in its sector.’

Murray International Trust (Ongoing charge: 0.87 per cent)

‘We like the fact the trust focuses on defensive business where the managers feel they will be able to retain both earnings and dividends, without paying over the odds,’ says McDermott.

‘It returned 18.9 per cent in 2022 and was the top performing fund in its sector.’

AXA Framlington Global Technology (Ongoing charge: 0.82 per cent)

Among the worst performing sectors of 2022 was IA Technology and Technology Innovations, with the average fund in this peer group making a loss of 24.3 per cent, says McDermott.

‘It is important in any fund to avoid the losers but no more so than in the technology sector.

‘Manager Jeremy Gleeson’s level-headed commitment to finding new opportunities with strong commercial potential, and ignoring yesterday’s winners, coupled with his and his team’s vast experience, makes this fund an appealing option for investors seeking technology exposure.

‘And, despite some high-profile disappointments in 2022, there were a number of good earnings surprises in the sector, which bodes well for the coming year.’

BlackRock Corporate Bond (Ongoing charge: 0.57 per cent)

Bond funds had a ‘torrid’ 2022 as every area of fixed income struggled, explains McDermott.

‘High inflation pushed interest rates up quickly and significantly. Rapidly rising yields led to rapidly falling prices.

‘But with rates expected to peak in the first half of 2023 and fixed income now paying an attractive level of income, many believe the outlook for bonds is positive this year.

‘This predominantly investment grade corporate bond fund combines the benefits of an experienced lead decision maker, Ben Edwards, with BlackRock’s vast resources. We like this fund’s flexible mandate and Ben’s track record of consistently exploiting inefficiencies in the fixed income market.’

Nomura Global Dynamic Bond (Ongoing charge: 0.69 per cent)

Managers need to read the economic environment as well as pick individual investments in the strategic bonds sector, says McDermott.

‘Dickie Hodges has repeatedly shown he is capable of doing both. He is incredibly knowledgeable about bond securities and derivatives and uses this skillset and a flexible mandate, to exploit opportunities.’

Rob Burgeman, senior investment manager at RBC Brewin Dolphin

AXA US Short Duration High Yield Bond (Ongoing charge: 0.63 per cent)

‘In the current environment, good short-dated, high-yield bond fund managers can do really well, especially as companies look to reschedule their debts,’ says Burgeman. 

‘This AXA US fund is a particularly interesting option among its peers.

‘Being short dated means the managers can be far more discriminating about who they buy from and lend to. And they have the benefit of reasonable visibility over the next year or so, as opposed to their long duration peers who have to look much further ahead.’

M&G Emerging Markets Bond (Ongoing charge: 0.70 per cent)

‘High inflation, rising interest rates, and a strong dollar combined to make it a terrible last 12 months for emerging markets,’ says Burgeman.

‘In our view, owning emerging market debt is a more attractive option than equities, given the current potential risk and returns.

‘There should be an element of mean reversion during 2023 as the dollar weakens, and one of the funds to benefit could be the M&G Emerging Market Bond Fund.’

Burgeman says the fund is divided, usually fairly evenly, into three buckets of assets – sovereign debt denominated in US dollars, sovereign debt denominated in local currencies, and corporate debt in dollars.

‘It is not one for the risk averse and is certainly not a fund to buy and hold forever. But it offers a 5.95 per cent running yield and you also have the benefit of different currency hedged classes, offering a degree of protection.’

Robeco Global Credits (Ongoing charge: 0.61 per cent)

This fund invests in investment-grade bonds and its top exposure is to the financial and industrials sectors, plus some government debt, says Burgeman.

‘If we accept that inflation will peak, the dollar will weaken, an interest rates may start to come down, corporate bonds are likely to offer decent returns and will be worth holding.

‘It provides a recovery play after the bond sell-off of 2022, and should give portfolios the ballast that bonds, in general, failed to do this year.’

iShares US Dollar TIPS (Ongoing charge: 0.12 per cent)

The fund invests in inflation-linked US Treasuries, and unlike its UK equivalents it offers a positive return, says Burgeman.

That means it will add between 1.25 per cent and 1.5 per cent on top of the US CPI rate, as opposed to -0.5 per cent less than the prevailing rate in the UK, he explains.

‘It also largely invests in much shorter duration bonds – mostly dated between one and five years, with some between five and ten years – which should mean lower risk and lower volatility. It won’t set your pulse racing, but should provide lower risk returns over the next few years.’

Allianz China A Shares (Ongoing charge: 1.1 per cent)

‘The last 12 months have been challenging for investors in China, with the country’s continued ‘zero-Covid’ policy putting a brake on a recovery in stocks,’ says Burgeman.

‘Recent protests show it is not going to be a smooth process whatever direction the government takes, but China should gradually begin to re-open in 2023.

‘That will be good news for many of the companies held in the Allianz China A shares fund, with the majority focused on the country’s domestic economy.’

He says these firms tend not to suffer from the same degree of political interference as larger cap, more international peers such as Alibaba and Tencent.

‘While the current upheaval may cast a shadow over the short term, this fund is one for the medium-term radar if the situation in China settles.’

Morgan Stanley Asia Opportunity (Ongoing charge: 0.99 per cent)

Burgeman says this fund may be an option for a ‘high-octane’ investor in Asia more widely than China.

‘During the last five years, this fund was up significantly compared to its index – by a factor of around four. But, it was also heavily affected by the sell-off of growth stocks during 2022.

‘If you want everything that Asia offers in spades and in every direction, this could be the fund for you. But, as the last 12 months has demonstrated, brace for impact – it’s unlikely to be an easy ride.’

Fidelity US Quality Income ETF (Ongoing charge: 0.25 per cent)

‘The US economy is likely to remain the engine room of global growth and US equities the bellwether for other international markets,’ says Burgeman.

‘The evolving environment means, however, that leadership may well change over the year ahead. Gone are the heady days of debt-fuelled expansion and in with more steady companies.’

This fund retains an exposure to the largest companies in the US like Apple, Microsoft, Chevron, Eli Lilly, Home Depot and Procter & Gamble, but its focus on income means it is more diverse and less growth-orientated than a simple index tracker, he explains.

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‘It has produced returns slightly better than the S&P 500 index over the last five years while, at the same time, producing a slightly higher income.’

Ben Yearsley, investment director at Shore Financial Planning

Matthews China Smaller Companies (Ongoing charge: 1.25 per cent)

The fund has had a lacklustre few years but is well-placed to capture the affluent and growing middle classes in China, says Yearsley.

‘Technology and industrial engineering are two of the largest sector weights. As China re-emerges from zero Covid there should be renewed enthusiasm.’

iShares US Treasury Bond Index (Ongoing charge: 0.10 per cent)

‘After a decade of low rates and the last few years clearly a time to avoid bonds, suddenly they look much more exciting with yields on offer of 6 per cent for some investment grade bond funds and 8 per cent or more in high yield,’ according to Yearsley.

From a safety first perspective, an ETF like this is worth a look, he says.

AXA Global Strategic Bond (Ongoing charge: 0.53 per cent)

This is a fund for those seeking more risk, where the manager decides where to invest across the bond spectrum, says Yearsley.

Amati Strategic Metals (Ongoing charge: 1.00 per cent)

‘It isn’t just gold and silver like most similar funds but invests across the metals universe with battery related metals a big play. It can be defensive or aggressive and plays into the decarbonisation and electrification theme.’

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