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Trust managers tip the UK as 2023’s best performing market, finds AIC study

06 December 2022

The survey among investment company managers found that 25% expect it to be the best performing region next year.

By Tom Aylott,

Reporter, Trustnet

Managers of investment trusts expect the UK to be the best performing region of 2023 as oil stocks will continue to dominate, according to a new study by the Association of Investment Companies (AIC).

A quarter of respondents said they anticipate the best regional performance from the UK next year, while 19% chose the US. Yet it is not just a one-year phenomenon. Even over a five-year period, 25% of managers said that the UK would be the best regional investment.

Ian Lance, manager of Temple Bar, said that the cheapness of UK assets gives it a significant advantage against the US heading into 2023, while Merchants trust manager Simon Gergel added that the undervalued opportunities in the UK makes it a great time for investors to increase their exposure to the region.

Gergel said: “This is an excellent environment for stock picking, as we are able to identify many strong businesses that appear to be mispriced, offering attractive dividend yields and the prospect of medium-term capital growth.”

More than a quarter of managers (28%) thought that the FTSE 100 would close at between 7,500 to 8,000 by the end of next year (it currently stands at just above 7,540), while 19% were more positive and expected the UK index to peak beyond 8,000.

Performance of FTSE 100 in 2022

Source: Google Finance

Around 28% of respondents also said that energy would be the best performing sector of next year as short supplies continue to boost the returns of gas and oil businesses.

This could potentially provide another tailwind for the UK, with energy companies accounting for 14% of the FTSE 100 index.

Investment company managers also tipped information technology (21%) and healthcare (11%) to be the leading sectors of 2023.

This was also the case for the next five-year horizon, with respondents predicting energy (33%), information technology (23%) and healthcare (11%) to outperform over the period.

Annabel Brodie-Smith, communications director at the AIC, said: “With the war in Ukraine continuing, it’s understandable that investment company managers have tipped energy to be the best performing sector of 2023 but predicting information technology to make a comeback is more unexpected.”

The US may have been the second favourite region for the short term, but 18% of respondents picked it as the second most attractive region over the next five years.

A quarter of managers anticipate an end to the war in Ukraine next year, which could ease depressed values in the region.

Marcel Stotzel, manager of Fidelity European trust, said: “We have started to cautiously increase our exposure to some companies that have performed poorly recently and now look particularly attractive.

“This includes companies in the financials and industrials sectors that have the potential to do well in a cyclical recovery but have the balance sheet strength and pricing power to weather any macroeconomic uncertainty.”

High inflation created a challenging environment this year, but it is relatively low on managers’ agendas as they head into 2023.

Only 11% of respondents said that it would be a major issue next year – most named slowing corporate earnings (22%) and recession (16%) as their biggest fear ahead of 2023.

Indeed, most managers (61%) predicted that inflation has already peaked at 11.1% in October, with 25% saying that it still had further to rise.

However, not a single respondent expected inflation to return to the Bank of England’s (BoE) target of 2% next year.

In fact, 36% of managers said that it would not reach these levels again until beyond 2025, although 22% do expect it to dip down to 2% at some point in 2024.

For interest rates, 42% of managers said that they will reach between 3% and 4% by the end of next year, while 28% expect them to rise to between 4% and 5%.

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