So far this year, many asset classes have defied predictions and underperformed or outperformed in contradiction to what the market was expecting. This wasn’t only evident in the growth and technology space, as discussed in a previous Trustnet feature, but in other parts of the market as well.
At the end of 2022, for example, experts were backing healthcare and China – the former on the backdrop of the Covid pandemic and the latter for its reopening after strict lockdowns. While these might still be good reasons to consider these areas, they have underwhelmed in the first months of 2023.
Performance of loss-making IA sectors in 2023
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Source: FinXL
Simon Evan-Cook, multi-asset manager at Downing Fund Managers said that markets have been “blown about by a swirling wind this year”.
“By that I mean there are periods in which, for better or for worse, the wind blows consistently in one direction, but this year the wind has shifted several times already, and it may well change a few times again before a longer trend establishes itself,” he said.
China and healthcare, however, are still viable investments for the longer term, according to experts.
The former hasn’t met the expectations of the market so far this year, but experts unanimously said that the underlying positive narrative of China’s reopening after its strict zero-Covid measures of 2022 will continue to sustain the emerging market, albeit at a slower pace than predicted.
Andy Merricks, fund manager at 8AM Global, said that the country remains attractive, despite possible risks.
“China bounced very quickly from when it reopened and everyone was a little late to the short-term bounce that happened, but the recovery will continue. Tencent was recently up 8% because it had excellent results and luxury goods will do the same,” he said.
“The biggest risk is that is China too supportive of Russia, bringing Western sanctions on itself. If it becomes evident that China are giving Russia physical weapons, then that could trigger another standoff between the East and the West.”
Performance of sector in 2022 and over the year to date
Source: FE Analytics
Kamal Warraich, head of equity fund research at Canaccord, said the reopening story had been confirmed in the real economy, if not the market.
“So there's been lots of exuberance about the Chinese reopening but we still think it's happening and a simple way of assessing this is the iron ore prices, which has sharply recovered as China started to increase demand over the last few months,” he said.
“Chinese tourism is recovering both domestically and internationally starting and consumers are going to start to spend again but that will take time to feed into corporate earnings. So these disappointing results of 2023 have really been a stock market phenomenon versus the real world.”
Many investors who wanted to remain underweight China, turned to India for an alternative emerging market, but were disappointed. RBC Brewin Dolphin investment manager Rob Burgeman wasn’t surprised.
“Regionally, India has suffered, but partly for the same reason that it did in 2022 – it isn’t China,” he said.
“One quarter doesn’t make a year, of course, and China’s reopening will remain a theme for 2023 and 2024, but there are other issues still within China that warrant some caution – the property market, continued geopolitical and economic spats with the US for example.”
The healthcare sector has been another laggard, despite the attention it has received since the outbreak of Covid.
Performance of sector in 2022 and over the year to date
Source: FE Analytics
This puzzled Merricks, who suggested that the underperformance was possibly due to “fatigue in the in the sector after it bounced quite well and other areas didn’t”.
“I'm surprised that it's at the bottom as it is year to date. I think that'll be temporary. Within our portfolios healthcare held up quite well in the fourth quarter of the last year. It's been disappointing comparatively this year, but there's still some interesting healthcare stocks that are not doing too badly,” he said.
“There's so many developments going on within healthcare, whether it's new drugs coming out or the medical devices, diagnostics or genomics, that I don't think you can leave it out of your investment shortlist. It looks like a good opportunity to start building healthcare positions again, because this sector isn’t going away.”