Where money managers are placing their bets in 2023

Fund managers break down which sectors they think are poised to do well, and which won't

Businessman checking stock market data
Canadian money managers say the energy sector is poised to outperform in 2023.

Money managers are placing their bets on which sectors are poised to do well in 2023, and a number of them are highlighting the energy sector despite widespread expectations that the global economy is heading into a recession.

"I think it's going to be an interesting year to watch commodities as we balance between the positive, which is the reopening of China, which should start to pick up some demand for energy and some of the other commodities like copper. But the big offset to that is going to be these global recession fears," Greg Taylor, chief investment officer at Purpose Investments, told Yahoo Finance Canada in a phone interview.

Within the energy sector, Taylor says he favours natural gas in particular because of rising demand for liquefied natural gas, as well as the energy services sector, which he says could see activity pick up in 2023.

Energy was the best-performing subsector on the TSX in 2022 thanks in part to improving fundamentals, something which many fund managers expect to continue.

Oil companies, in particular, have seen their cash flow balloon amid elevated crude prices, but many of them have been reluctant to expand production. Instead, they've opted to reward shareholders with buybacks and rising dividends.

"If you look back through COVID, [energy companies] got a good lesson in cost-cutting and managing expenses," Ilana Schonwetter, investment advisor at Vancouver-based BlueShore Financial, said in a phone interview.

"Energy companies have had this track record that when energy prices go up, they go on a tremendous spending spree and then energy prices come down, and they are sitting there with all this additional capacity. That has not been the case. I think many of them are running quite lean and running very, very clean balance sheets. So I think that supports a good year for energy."

The TSX's heavy skew towards commodities in general will likely help the index outperform in 2023. Wolfgang Klein, senior vice-president and portfolio manager at Canaccord Genuity Wealth Management, says he's "fundamentally keen" on the sector.

"The world continues to consume the stuff that Canada produces from two-by-fours to ounces and pounds of copper and silver," he said.

"I think Canada still has a chance to outperform this year as it had last year because of our commodity centricity and lack of technology."

Tech to remain a laggard

The high-flying tech stocks of the pandemic had the air taken out of them over the course of 2022, which weighed on tech-heavy indices such as the Nasdaq.

While many money managers still see more room for tech stocks to fall, there are some specific opportunities in the sector.

Though Klein mostly favours American tech companies, he owns shipping software firm Descartes Systems Group Inc. (DSG.TO DSG). The company is a play on economic reopening and supply chains but it's expensive on a valuation basis, he says.

"Every now and then you get a Canadian darling. And if there's a good Canadian stock that's in the tech sector, it tends to get overbought by managers who need to own some technology," Klein said.

Schonwetter says she's content with continuing to hold some larger tech companies that have a healthy balance sheet and subscription-based revenues but smaller, unprofitable tech firms will likely be challenged in this higher interest rate environment.

Financials on the sidelines

Canadian bank executives have said they're preparing for a tougher economy in the near term as higher interest rates and inflation hammer consumer spending and the housing market.

"Financials could be, kind of, on the sidelines with some of these concerns around growth and also around the housing market," Taylor said.

The widely-owned Canadian bank stocks dropped last year as a result.

"The Canadian banks are a bit of a mixed bag. The ones with foreign exposure and more aggressive stances are being punished. The ones with a little more stable North American exposure are doing quite well," Klein said.

"There are some concerns around the Canadian banks. But I still think that they're okay. You've also seen some money leave the Canadian banks and it's going to other areas of the financial sector which is the insurance stocks. They're defensive because you're going to insure your house and car regardless."

Going on the defensive

Along with insurance, many investors will typically turn to grocery, telecom or utilities stocks in times of economic hardship, with the thinking that consumers will still pay their cell phone, hydro and grocery bills.

Utilities and telecom stocks are also well-liked among dividend-hungry investors.

Schonwetter says she likes those two sectors as a whole but investors should favour companies with little debt.

"Utilities tend to be a little bit more leveraged than telecom companies. This is a time where you have to be more company specific and actually take a look at what the free cash flow is at the company. What is their ability to continue generating income in this environment? Have they had any rising costs? Can they pass them onto the consumer?" she said.

"So, they are both very good defensive sectors. Those companies are typically very good dividend payers as well, which is crucial in this environment, but I would not be investing in a sector ETF, let's say for example. I would be more company specific going into 2023."

Investing amid recession concerns

After a volatile 2022 that saw inflation surge to levels not seen in four decades and interest rates jump 400 basis points, the new investing year will likely be less turbulent, Schonwetter says.

"I think on the note of inflation continuing to decline, I think on the note of interest rates perhaps peaking at this time, it does set things up for a less turbulent 2023," she added.

"However, I will say that given the environment we are in, with a lot of discretionary spending power being eroded due to a combination of inflation and higher rates, I think the areas that are going to do best going into the first half of 2023 are going to be energy industrials, and consumer defensives."

Owning high-quality businesses that can make money in any environment is the name of the game, according to Schonwetter.

As for the possible recession ahead, much of it is already priced into the market, Klein says, since this is "the most publicized recession ever." He says investors that position their portfolio for the long term will be fine in the end.

"2023 will not be easy. But, you know, investing isn't supposed to be easy. And everything will normalize and mean revert. If the market is down, that's fine. When the bull does come, it will just be that much greater," he said.

"This is not about the next 12 months but about the next 12, 15, 20 years and the rest of your life. Buy quality stuff, diversify, spread it around, and you will be fine. To try to chase rainbows all the time is just a little too tricky."

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

Download the Yahoo Finance app, available for Apple and Android.