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Large cap value outlook 2023: Strength in the “old economy”?

      

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December 2022
 

2022 was marked by inflation, rate hikes and pressure on the global economy. Will 2023 share these attributes? Here, Newton portfolio manager Keith Howell explains why he believes we are amid a multi-year regime.

Highlights:

  • We anticipate 2023 will provide further evidence that we are in a new multi-year regime, characterized by higher rates and inflation than we have seen in the last decade.
  • We think value-oriented companies with better relative earnings trends are well positioned to outperform the broader market as we navigate onward to 2023.
  • We anticipate “old economy” investment strength, supported by several drivers including onshoring, automation, electrical infrastructure and efforts that alleviate supply constraints.

In 2022, markets declined as persistently high inflation, aggressive rate hikes and a reduction of liquidity put increasing pressure on the global economy. We anticipate 2023 will share key similarities with 2022, providing further evidence that we are in a new multi-year regime, characterized by rates and inflation that are higher than we have seen in the last decade.

The Federal Reserve (Fed) largely spent the second half of this year reiterating the importance of reining in inflation to more appropriate levels. In 2023, we expect the Fed to continue this steadfast commitment to raising interest rates and sustaining quantitative tightening until data shows a material deceleration in pricing pressures. Even when these inflationary pressures moderate, we believe they will remain above the trend of the last decade. More positively, the US is experiencing continued robust employment trends and consumer savings appear strong, thanks to the fiscal stimulus measures of 2020 and 2021. However, the overall economic growth outlook looks increasingly challenged owing to the Fed’s aggressive tightening stance.

These near-term economic pressures are likely to usher in a phase of reduced earnings expectations. However, value stocks widely protected investors in the challenged environment of 2022, and we think value-oriented companies with better relative earnings trends are well positioned to outperform the broader market as we navigate onward to 2023.

Volatile macroeconomic and market dynamics can make it difficult for investors to find returns. We believe companies with strong balance sheets and cash-flow generation, trading at attractive prices compared to their future cash flow-generating power, provide compelling investment opportunities. It is also important to be effectively positioned for when this period of stifled economic growth eventually abates, and cyclical companies can take advantage of a potential upswing in the market. Such cyclical companies are well represented in the value space and have historically led in market upcycles following downturns.

Looking ahead, we expect segments of the market will continue to digest the pull forward of demand brought on by the pandemic. Furthermore, we anticipate ‘old economy’ investment strength, supported by several drivers including onshoring, automation, electrical infrastructure and efforts that alleviate supply constraints. This new market regime should place a greater emphasis on profitable and sound business models as investors hunt for returns. Finally, we expect 2023 to be a market conducive to our long-standing US large-cap value and income philosophy of focusing on opportunities at the intersection of valuation, fundamentals and business momentum.

As always, we are actively using pockets of near-term volatility to try to identify attractive relative opportunities. We continue to be constructive on cyclical areas of the market that provide strong relative value and robust balance sheets through uncertain times. We are selectively finding cash-flow stability at attractive valuations and catalyst-driven business improvement.

Disclosure

All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA). NIM is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Both Newton firms are registered with the Securities and Exchange Commission (SEC) in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton is a subsidiary of The Bank of New York Mellon Corporation. Newton’s investment advisory businesses are described in their Form ADVs, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.

Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.

BNY Mellon Investment Management is one of the world’s leading investment management organizations, encompassing BNY Mellon’s affiliated investment management firms and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change.

The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

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