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2022 was packed full of stock market surprises. I suspect 2023 will also deliver its share of unexpected news for investors.
Despite this, I think there are already some clear trends in play that could shape market performance this year.
For my first article of 2023, I’m going to attempt to predict three trends I think will have a big impact on my investment profits over the coming year.
1. The market hasn’t bottomed out yet
The UK market has staged an encouraging rally since mid-October. The FTSE 100 is has risen by nearly 10% over that period and is now trading broadly flat on a one-year view.
Even the hard-hit FTSE 250 has staged a partial recovery. At its low point on 12 October, the mid-cap index was down 30% year-to-date. As I write, that loss has reduced to a one-year fall of 20%.
However, I don’t think the market slump we saw last year is over yet.
In my view, the combination of rising interest rates and slowing economic growth will trigger a further sell-off at some point during the first half of the year. I don’t think it will be too severe, but it could provide some great buying opportunities.
I’m holding some cash in my portfolio, in the hope that I’ll be able to pick up some bargains in the new year.
2. Dividend shares will be big
UK savers can now get 3% interest on cash savings accounts. However, inflation is still over 10%, which could mean that prices keep rising.
This situation will be a new experience for many people. I think it will mean that investors start taking income-producing dividend stocks more seriously.
I feel companies with attractive dividend yields (say, 4%-6%) and stable growth rates could be in demand. Stocks such as these should have the potential to deliver a rising cash income and capital gains, providing protection against inflation.
To help me select shares, two numbers I look at are the dividend yield and the expected dividend growth rate for the year ahead.
If these two numbers add up to at least 7%, I think the valuation could be attractive. But I’ll always check that the forecast payout looks affordable when compared to profits, debt levels, and cash flow.
Right now, I’d avoid higher yielders with poor earnings cover and too much debt. A dividend cut could be in the pipeline.
3. The next ‘hot’ growth sector
Rising interest rates mean that the cost of funding for new businesses is going up. I expect that for speculative, loss-making companies will find it harder to raise funds in 2023 than in recent years.
I think this could be good news for Foolish investors. Companies that are small, profitable, and have good growth prospects may finally attract the attention they deserve.
On the other hand, companies that make a lot of noise but don’t produce much cash could see their share prices fall to more suitable valuations.
Many decent small-caps stocks suffered brutal sell offs in 2022. Although risks remain, I think there’s good value in today’s market for careful stockpickers.
Wishing you good luck in the markets in 2023!
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