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This is an audio transcript of the Money Clinic podcast episode: ‘What will 2023 bring for your investments?’

Claer Barrett
Everyone’s worried about money right now, but Money Clinic is here to help. I’m Claer Barrett, the FT’s consumer editor. Even if you don’t want to come on as a guest, we’d like to hear your ideas for money-related topics you’d like to learn more about on the show. Email us via money@ft.com and let us know what’s on your mind.

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Could 2023 be a year of change for investors? 2022 was a turbulent year. The war in Ukraine, soaring inflation and a string of interest rate rises have resulted in economic uncertainty and market volatility. Plenty of investors who got started on the lockdown may have seen the value of their portfolios fall and with a challenging outlook ahead, perhaps you’re looking to change your investment strategy in the new year or are wondering whether to stick with investing at all. On this episode of Money Clinic, we’re gonna hear from an all-star panel of the FT’s investment writers. What do they think the year ahead will bring for investors, and where might the opportunities lie?

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Welcome to Money Clinic, the weekly podcast about personal finance and investing from the Financial Times. I’m Claer Barrett, the FT’s consumer editor.

Before we get going, a disclaimer. We will be talking about investments in this podcast, but as you know by now, the first rule of investing is: always do your own research. Our discussion today is intended for educational purposes and is not intended as an investment recommendation or individual financial advice. Now that’s over with, let’s meet our panel of investment writers, starting with Stuart Kirk. Now Stuart, welcome to the podcast.

Stuart Kirk
Hi, Claer.

Claer Barrett
You’ve recently started writing a new weekly investment column for the FT called Skin in the Game. Tell us a little bit about that.

Stuart Kirk
Yeah. So the idea is twofold, I think. It’s to bring almost 30 years of professional and institutional investment experience to a wider audience. And the gag is, unlike most investment advisers, is that I’m going to show people what I’m actually invested in myself.

Claer Barrett
Now, Rosie Carr, the editor of the Investors’ Chronicle, we worked together for many years. It’s the FT’s weekly publication for retail investors. Rosie, a joy to have you on the show. What would you say are the big issues on your readers’ minds right now?

Rosie Carr
Hi, Claer. Yeah, great to be here with you, Stuart and Rob. The big issues for our readers — certainly the key one remains inflation and then high interest rates, followed by recession which we may already be in, because none of these things are particularly helpful for companies. I suppose one thing we can say about the coming recession in the UK or the one that we’re in, is that although it’s expected to be longer than downturns elsewhere, the Bank of England says that it’s probably going to last right through the first half of 2024. It’s not expected to be that deep, which is at least one positive.

Claer Barrett
The chink of sunshine amidst the gloom. Now, last but absolutely not least, we have friend of the podcast, Rob Armstrong. Rob, you’re joining us from the New York office. You write our Unhedged newsletter and you’re our financial editor in the US. Now from a retail investor’s point of view, how does it look from the other side of the Atlantic?

Rob Armstrong
Well, the situation is a little bit different from the UK, in that the US economy has been surprisingly resilient thus far. And yet we hear this word: recession, recession, recession. The Fed is, our central bank, is making scary noises. So we’re leading this kind of double life where everybody is waiting for the recessionary shoe to drop and it sort of refuses to do so.

Claer Barrett
Now, in a few words, each of you, what would you say has been the toughest thing for investors to deal with this year? We’ve talked a little bit about inflation. Stuart, what else would you pick that’s been particularly challenging for you?

Stuart Kirk
What we’re often told is to have a diversified portfolio. And so one of the toughest things this year is that everything has fallen effectively, and usually bonds counteract equities and vice versa. But it’s just been tough in the sense that everything has fallen. And so I guess the key question for us for next year is whether that will change.

Claer Barrett
Hmm. And Rosie and Rob, what would you add to that? In a few words, the toughest thing investors have had to deal with?

Rosie Carr
Yeah. I think for a lot of the new investors coming into the market, they got for the first time a nasty reminder that, you know, some things in the market, they don’t go up in a straight line forever. Yeah. And it was a very tough year for certain types of companies — small-caps, growth companies and private equity — because investors began to really worry about how these companies were going to manage the higher cost of servicing debt. And, you know, and also might find it hard to raise new funding. And that’s their lifeblood.

Claer Barrett
Rob, what would you add?

Rob Armstrong
There was a handful of stocks that have worked so brilliantly well for the last decade. And I’m thinking of not the speculative tech companies, but the great big ones, the so-called Faangs — Alphabet, Apple, Facebook, Google — and those have been just money good for so long and the most extreme case being Facebook. But all of them are down worse than the market. So it was like one of your north stars, which was these extremely high-quality, extremely profitable, extremely large American tech companies. The bottom has kind of fallen out. And it really shakes your faith, I think.

Claer Barrett
Mmm. The north star has headed south! Now as we look at the year ahead in 2023, how do each of you feel that investment landscape might change? What are the kind of things that investors listening to the show should be looking out for?

Rosie Carr
The outlook for 2023 is probably better than 2022, although not immediately. You know, inflation is still a problem, but it is set to fall and we’ve seen that the rate of price rises is already falling in figures released this week in the US and the UK. That means ultimately that interest rates will also peak, which will produce, deliver a boost to the market and it’ll be very good for growth companies. But we have to bear in mind, there is a recession. We can’t ignore that. And that’s gonna put pressure on company earnings. Just recessions are bad news for companies. People cut back on the spending. They delay purchases, but certain parts of the market will be fine. You know, it’s much more difficult to cut back on essentials, consumer staples and health products.

Claer Barrett
Stuart, did you want to add anything to that about how the investment landscape might change?

Stuart Kirk
Let’s start with the big one. So the biggest asset class in the world is bonds, 130tn or so. I’m pretty positive on fixed income for next year. I think inflation doesn’t look like it’s gonna be quite as brutal as people may have feared.

And then the next biggest asset class is equities. And equities takes its lead from America, and American equities takes its lead from those big tech firms that Rob was talking about. Here I’m less certain — I think it depends on whether you think those companies are now good value or not. I’m still pretty old-school in thinking that you can value these companies using old-school metrics. And on those metrics, some of these companies still look expensive to me.

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Claer Barrett
Staying with you, Stuart, talking about how investors are shifting their strategy in response to how markets are changing. It’s interesting that you mentioned bonds because younger investors do tend — with their stocks and shares Isas — to focus more on equities and less so on bonds. Stuart, do you think there’s more of an argument for retail investors to look at bonds in the year ahead? Why might they do that? And what are the pros and cons?

Stuart Kirk
Yeah, I mean, bonds aren’t as fun as talking about Apple and talking about crypto and talking about gold and talking about Warren Buffett. Fixed-income assets and securities are pretty tricky. It’s duration, it’s term premia that, maturity this. It’s hard stuff, but it is the world’s biggest asset class and that asset class has been really important throughout history as providing a counterweight to equities. They’ve tended to go up when equities have gone down, although that hasn’t happened in the last 15 or 20 years or so. And they’ve also given you a risk-free return when interest rates were higher, that kept you in food and electricity year in, year out. And that’s why people like our parents have always owned them.

Now, the trouble is that equities have shot the lights out over the last 20 years. Interest rates have been very low and there hasn’t really been a huge amount of reason to own them, although they have gone up nicely. But I think now is the time for most listeners to this programme to actually get on to Wikipedia and work out what drives bond markets. And there are two big bond markets. There’s the government bond market lending to Uncle Sam or to the UK government, and then there’s corporate bonds. This is companies raising money. And they both have their attractions and they’re both yielding, paying you a higher rate of interest than they have in the last 20 years or so.

Rob Armstrong
If I could just follow up on Stuart’s point there. I’m gonna use one of those wretched technical terms that he just referred to, which is, at least in the United States, we have what’s known as an inverted yield curve, which is a weird thing in which a short-term bond pays more interest than a long-term bond. And what that means is you can actually get a pretty good yield right now from a one- or a two-year or even a shorter duration than that, full-faith-and-credit US treasury bond. So for investors who for whatever reason in some part of their portfolio can’t take much risk right now — maybe they’re looking to buy a house in a year or two and don’t wanna risk their capital or so forth — there is, for the first time in a very long time, an opportunity to buy a short-term bond and actually get a yield that might mean a little something. So I think for a certain subset of investors, this is a real cause for rejoicing.

Claer Barrett
Now, Rosie, feel free to give us your thoughts on bonds, but also dividend income, another category of investment loveliness that has traditionally appealed more to older investors. But maybe now younger investors have been turned on to the benefits.

Rosie Carr
Yeah, that’s true. And one thing that the UK market is really good at is dividends. The UK market, you know, the FTSE 100 didn’t have such a terrible time this year. And that’s partly because of its companies that pay dividends. Big . . . 

Claer Barrett
Mmm, the banks, the oil companies.

Rosie Carr
The energy . . . Yeah. Yeah, absolutely. It was a good year for them and the UK market is stuffed full of them. We don’t have so many tech companies, but we do have the old-fashioned fossil fuel providers and so on. Now next year, even if there’s pressure on some of those companies — we’re already seeing that in the energy sector — it won’t stop the payments. They may be reduced slightly, but most of these companies have really good earnings cover, so we’d expect them to keep paying out dividends.

Claer Barrett
Now let’s talk for a little bit about passive funds. Now, that strategy has served people quite well over the past few decades. But, panel, do you think it can stand the test of time?

Rosie Carr
I do. I do. I think passive funds are a brilliant thing to have in your portfolio. And for a lot of investors, it’s probably the only way they’re ever going to invest. I think for people who have a bit more time and want to stockpick and you like the idea that you might be able to beat the market, then, you know, again, start with passives, build on that with active funds and then start picking individual shares. And using active funds, you’re going to learn a huge amount from the managers, from the, you know, newsletters to people about why they’re focusing on certain sectors. So there are lots of benefits to doing that.

Claer Barrett
Mmm. Stuart?

Stuart Kirk
Yeah. I mean I would be even more aggressive. And speaking as someone who’s managed active equity portfolios his whole life, I’m this strange person to say I would recommend no one ever does so and no one ever buys them. In a good year, active managers, half of them, they beat the index. Most years, two-thirds of them fail to beat the index. They’re expensive. The bog-standard funds in my pension fund charge a per cent a year. If you think you’re only gonna get 6 and 7 per cent real return, that’s a big chunk of your annual return. I think for the average investor, there’s absolutely no reason on earth why you would actually choose an active manager or pick stocks yourself. It’s almost impossible to do. The academic literature is clear on this and you save the fees as well.

Claer Barrett
Wow. And Rob, do you have a view on passives?

Rob Armstrong
Well, I would echo what Stuart said there, and there is plenty of work to do as a manager of your own portfolio or a planner of your own retirement. Once you’ve taken the stockpicking decision out of the picture, you still have to think about how you allocate your capital across different kinds of passive funds, between different kinds . . . 

Claer Barrett
True.

Rob Armstrong
 . . . of asset classes, between different countries. So, it’s not like path you can just have passive funds and turn your brain off. You’re still got plenty to think about and work on and have fun with once you go the passive way.

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Claer Barrett
Now, for those investors who do like to take a bit more of an active approach to investing, let’s move on to where the best opportunities for investors may yet emerge in the year ahead. Rosie, what sectors and parts of the world are your readers the most interested to read more about in the pages of the Investors’ Chronicle?

Rosie Carr
Well, I suppose the things to note about going into a recession or a bear market is that recessions impact sectors in different ways. So it’s a reason why people should always have, you know, good diversification in their portfolio. The UK market also only accounts for about 3 to 4 per cent of the global stock market so you should have exposure to US which is the other key or the biggest global equities market. China, you know, the rest of the world, you have to have exposure to that. Another thing is that, in a bear market, when everything is getting marked down, it creates an opportunity to buy into quality companies at discounted prices.

Claer Barrett
Mmm.

Rosie Carr
Ultimately, there are going to be really good buying opportunities because troubled markets make investors nervous and that means falling share prices. So, there will be companies with no underlying health problems, and that’s an ideal time to pick up those quality shares at a discounted price.

Claer Barrett
Mmm. Now turning to Rob first and then Stuart. What kind of things are on your watch lists at the moment?

Rob Armstrong
Claer, for the last 15 years, there has been one piece of financial advice that has really worked, and it’s three words long. And those three words were “Buy American stocks”. And, anything else you did besides that for the last 15 years was a suboptimal strategy. Foreign stocks, bonds, anything, we just got murdered by American stocks. Emerging markets, wrong. China, wrong. Europe, wrong. Japan, wrong. So, what’s interesting is after 15 years of that, the difference in valuation between America and the rest of the world is getting pretty high. But you know, that question, can the rest of the world catch up with America? That’s kind of number one on my radar going into next year.

Claer Barrett
Hmm, and of course, for UK investors, we have been more insulated because of the currency effects. You know, the S&P may have fallen, but because of the currency translation and the strong dollar, UK investors haven’t seen such a big fall in any US investments that they might hold. Stuart, what would you add to this kind of areas that you’re looking at and will be writing about, no doubt, in your column in the new year?

Stuart Kirk
Yes, I completely agree with Rob. You want a big chunk of your money in US equities. But as I wrote in my column, I think Asian equities for the first time are looking more interesting. People say that all the time and they have done well. They just haven’t done well as US stocks. But I think, now they’re even cheaper than they have been in the past. They’re about a third as expensive as US ones on an earnings basis, about half-priced on an asset basis. Apropos our discussion about dividend. They actually had the most superior dividend growth over the last five years, better than Europe, better than the US. They generate more free cash flow per unit of equity than anywhere else outside of Latin America. So I’m not saying they’re gonna outperform the US but I think, they don’t usually like a strong US dollar and they don’t usually like high US rates. But if those things have peaked or neared the peak, I think it might be an interesting place to fish.

Claer Barrett
Now, one of your first columns in the FT, which actually really divided opinion among our readers, were about your views on UK stocks — as Rosie was saying, a very unloved area of the market. Tell us a little bit about why you do have faith in the UK economy.

Stuart Kirk
Yeah, so I think the UK is suffering a bit. Its reputation has taken a bit of a sully post-Brexit. Politics looks a bit of a shambles. I don’t think people locally quite realised what a laughing stock we seem to be outside of the country. But that’s very, very different to the question of do company management teams care about shareholders? And this is a very important thing for listeners to understand. There’s a big difference in GDP growth rates, revenue growth, etc, and whether management teams really care about equity owners. And one of the reasons why the US has been such a strong performer, as Rob said, is that company management teams in the US really, really care about returns on equity. And, I would say, UK bosses do as well.

Claer Barrett
Mmm. And Rob, you were based in London with me in the FT office for many years. Do you, do you hanker after having any UK stocks in your portfolio or are you going to avoid, avoid, avoid?

Rob Armstrong
Oh, they look cheap. I would you know, I would put, you know, I would sort of say, I’m interested in, as I said, in value stocks over the next couple of years. And the UK, whether it’s a historical coincidence or not, has a lot of those. And so, owning part of a market with high-quality companies at low valuations in industries that seem poised to take back some of the underperformance they’ve had in recent years, I think, is appealing.

Claer Barrett
Mmm. And Rosie, I want to bring you in here, because we haven’t yet mentioned investment trusts on the podcast. And that’s something I know as a former IC writer that your readers are very, very keen on. What do you think the year ahead might bring for the world of investment trusts?

Rosie Carr
Yeah, our readers do love investment trusts, mostly because of the really good returns they get from them. That’s partly to do with the structure, the fact that they can use gearing, which is borrowing money to invest, and because they have boards of management so there’s an extra layer of accountability. And they cover all markets. All asset classes are a great way for investors to cover all sectors that they’re unfamiliar with. Now, lots of them at the moment are on wider discounts than at the start of the year. And that means that, you know, if the UK market as a whole is on a discount and good value, well, so are these trusts. You’re getting more for your money than you’re spending.

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Claer Barrett
Now, another theme that we haven’t talked about is the green theme — ESG. Plenty of our listeners are invested in ESG funds, but the energy crisis has put some big obstacles in the path to net zero. The FT reported recently the UK is about to open its first coal mine in over 30 years. Stuart, ESG is a top topic for you. What are your thoughts on how this market might pan out?

Stuart Kirk
You’re absolutely right. 2022 was a nightmare for two reasons. One, the brown stuff did well — the oil companies and the gas companies and the industrials and that sort of stuff. And on the other side, tech did badly and tech generally scores very, very well on ESG scores because it’s asset-light and doesn’t belch things into the atmosphere. So it’s been a double blow for various ESG funds. So you could actually think that 2023 might not be so bad, but you really need to make a call on those two big sectors. Indeed, some of those ESG funds were basically 50 per cent tech. So you’re really not buying the future of the planet a lot of the time. You’re buying a tech fund with a bit of farmer and consumer in them. So unless you’ve got a strong view on those sectors, and conversely energy, only then can you make a call on whether you think those ESG funds will outperform a non-ESG fund.

Claer Barrett
Mmm. I mean, I’ve never bought an ESG fund. It’s not because I don’t care about the planet; it’s because I’m more concerned about greenwash and whether investors are being sold something that truly is ESG, as you say, or are being sold something that they don’t really understand. Rosie and Rob, I don’t know if you’ve got any thoughts you want to throw in on ESG?

Rosie Carr
Yeah, it’s been a very complicated area. Even the darkest green funds — if you could call them that — some of them hold fossil fuel companies, and that probably isn’t what the investor is expecting. So you have to be really thorough and find out whether the fund, you know, matches your requirements. Does it have strict exclusion policies or is it engaging with companies to help them change and therefore arguing that it’s OK to have these awful companies that the investor doesn’t want? I think things are improving here and I think the FCA has said that it’s gonna try and improve labelling, but it’s a very slow-moving market.

Claer Barrett
Mmm. Well, certainly we’re all worried. We’re all very worried about climate change and regardless of the greenwashing, that doesn’t change.

Now, before we go today, I am going to ask all of you for the message that you would pass on to young investors at the moment. As we said at the top of the show, in the last few years, under lockdown, lots and lots of our listeners have got into investing for the first time, but 2022 has been a real test of their patience. Lots will have lost money. Many are wondering whether to stick with it or not. Shall I start with you, Rob? What would your message be to young investors?

Rob Armstrong
What I would say to young investors is, you should be waving a banner from the point of view exclusively of your stock portfolio, of course, and putting aside all other considerations, you should be waving a banner that says, “Yay, recession. Yay, stock market crash”. Let’s have terrible things happen because one thing we know in, the investment world is extremely uncertain, this we know. When you pay lower prices today, your long-term returns, 10 years, 20 years down the road, are gonna be higher.

Claer Barrett
Stuart, how can you build on that? What’s your message for young investors?

Stuart Kirk
You can’t build on that. That’s all you need to know. And on a practical basis, you really need to remember Rob’s words when a market is having a really bad day, because that’s when you are desperate to sell. And what happens is the market then recovers quickly the next day or the next week. And those rebound days contribute between a third and a half of all returns.

Claer Barrett
Very good. And Rosie, last but not least, what is your message for younger investors?

Rosie Carr
Number one, do not sell off and get out of the market. And regardless of all the problems that we have at the moment, if you’re not in, you can’t reap the rewards. And we all know that equities deliver the best rewards long-term, so take a long-term view. Young investors have time on their side and they can invest in these really exciting, big themes of technology, infrastructure, healthcare and so on.

Claer Barrett
I mean, the only thing that I would add to that as my own message for young investors is make sure that you’ve got an adequate emergency fund. And my other message would be, automate. If you’ve looked at your budget and you can afford to make some regular investments every month, then set it up on an investment platform, make a regular investment plan so you don’t have to think about it, and that the money just goes out every month as you’re sleeping.

All that remains for me to do is to thank our amazing panel: Rob Armstrong from the FT’s New York office; Stuart Kirk, our FT investment columnist; and Rosie Carr, the editor of the Investors’ Chronicle.

Rob Armstrong
Good fun, Claer.

Stuart Kirk
Thank you, Claer.

Rosie Carr
Thanks, Claer. Been a pleasure.

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Claer Barrett
That’s it for Money Clinic this week with me, Claer Barrett. We hope you enjoyed the show. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues. If you’re interested in being part of a future episode or if you just have an idea for one, then email us at money@ft.com. Take a peek at our website FT.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram, Twitter and TikTok. I’m @ClaerB.

Money Clinic was produced in London by Persis Love. Our sound engineer is Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music. And finally, just to repeat our disclaimer, Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week and very good luck with all of your investments in 2023. Goodbye!

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