Stock Market: What Should You Focus On in 2023?
The majority of investors are now focusing their attention on 2023, planning and attempting to determine which trends will provide the most lucrative chances for trading and investing as the year 2022 comes to a close. This year was quite volatile and full of unpredictable events. Read this article to learn more about what to focus on in the stock market in 2023.
Which Trends Should You Expect to Drive the Stock Market in 2023?
Inflation and interest rates have been the primary factors that have caused stock values to decline for the whole of 2022. These concerns will continue to take center stage in 2023 as investors worry about the possibility of a worldwide recession. In 2022, the central banks of many nations did, in fact, significantly raise interest rates in order to battle inflation. This resulted in a rise in the cost of borrowing, in addition to a loss of buying power brought on by inflation, which have definitely impacted spending, investing, and saving habits.
In addition to these factors, it will be essential to monitor how the conflict in Ukraine develops as well as the effects that the sanctions that the West has imposed on Russia have, particularly in relation to the country’s exports of energy like oil and natural gas. Last but not least, the manner in which the reopening of China is managed might have a significant impact on the development of the financial markets, especially regarding the management of new COVID-19 cases.
If all goes according to plan, the government will reopen its economy, and life will return to normal in the country. After that, the consumption of many different goods and commodities should restart, which might possibly encourage development in the country and across the world.
However, the population hasn’t been as vaccinated as in other countries, especially older people. So, if COVID-19 cases were to erupt and compel the government to shut down its economy again, then the repercussions may be catastrophic for both the local and global economies, depending on the degree of the restrictive measures imposed.
Focus On Your Attention On Defensive Stocks
It is highly possible that 2023 will be just as turbulent and unpredictable as 2022 was. In this scenario, investors should focus on defensive stocks, which are those that have the potential to provide some degree of stability in the event that a recession or uncertainty over the macroeconomic environment occurs.
When a company’s performance is largely constant throughout time, irrespective of the status of the economy as a whole, that company’s stock is said to be defensive. Due to the fact that they are not affected by the cycle of the economy, these stocks are also called non-cyclical stocks.
As a matter of fact, defensive firms are less likely to be adversely impacted by the expansion and contraction stages of the conventional business and market cycle. This is due to the fact that the goods or services that defensive companies provide are often essential to the lives of their customers. Some examples include consumables like food and drink, utilities like gas and electricity, medical supplies, as well as services like garbage collection and water purification.
Additionally, despite having a higher stock price, defensive companies often maintain a consistent dividend payment, which provides a passive income to investors, in both bullish and bearish markets.
Because they are cheaper and less risky, these stocks are usually a preferred option for less experienced investors, who are not as familiar with how the stock market works, or for investors who have a risk-averse profile.
Closely Monitor the Development of Growth Stocks
Despite the fact that defensive stocks are a prefered option to be included in portfolios in order to provide stability, it is essential to monitor the development of growth companies. As a general rule, growth or cyclical stocks, which are regarded riskier than defensive stocks, provide more attractive trading and investing possibilities than the latter. This is because growth companies are more likely to suffer losses during uncertain times and periods of increasing interest rates.
This is due to the fact that growth stocks are equities that have growth rates much greater than the average growth rate of the market. This suggests that a growth stock is expanding at a faster rate than the average market stock, and is consequently earning profits at a faster rate (or at least investors are expecting higher profits), which enables investors to benefit from a greater increase in the stock price.
When markets are going up and the economy is doing well, growth stocks will typically do (very) well in terms of performance. In point of fact, they provide more exciting and profitable opportunities than defensive stocks, which have a tendency to perform less well when economic and market circumstances are strong. Growth stocks are also more likely to be more volatile than defensive stocks.
However, because of the numerous uncertainties that surround the outlook for economic growth as a result of the conflict in Ukraine, inflation, the gradual reopening of China, and the tightening of monetary conditions around the world, markets have moved away from growth stocks, which are considered to be riskier investments.
This indicates that the valorization of certain growth stocks may have reached lower levels, or at least levels you might think are more reasonable to buy them at, and you may choose to include these assets in your portfolio as a long-term investment option.
Try to focus on well-known and popular companies whose products or services will be attractive again, once people have more money to spend on less essential items like luxury for instance.
Prioritize Businesses Who Have a Strong Pricing Power
If you believe that inflation will remain an issue in the medium to long term, you should invest in businesses that have high pricing power. This refers to businesses that are able to increase their prices without seeing a significant decrease in demand for their goods or services. Such companies are often a great bet when trying to find investment vehicles against inflation risk.
They are often industries that have high demand, such as the electronics industry, pharmaceutical industry, aviation industry, food industry, restaurant industry, and textile industry. However, it is also essential to take into consideration the elasticity of demand, the development of the industry and its profitability, as well as shifts in the cost of the raw materials or other inputs utilized in the production of these goods or services to determine the best companies to invest in.
Consider Financial Stocks
If you believe that interest rates are going to remain as high as they are now for a while, or if you believe they will increase in the countries you’re investing in, you can consider buying financial stocks that will benefit from high interest rates through higher income on interest, like banks, brokerage firms, and insurance companies, among others.
However, it is always important to take into consideration the general context, as pessimistic growth prospects might strongly impact investment and spending behavior, which can significantly lower the credit activity, which will in turn influence the profit margin of these companies.
How to Invest in the Stock Market?
There are different ways to invest in the stock market in 2023, mostly depending on your trading style, your risk appetite, and your financial objectives.
You can either buy stocks and become a shareholder to take advantage of price appreciation over the long term, as well as potential dividend distribution, or you can trade shares over the short term with CFDs or Contracts on Difference (or similar financial products) to take advantage of the market volatility on bullish and bearish price movements.
Now that some brokers like ActivTrades offer you the option to invest in real shares, as well as to trade CFD on shares, so then you can have a complete trading and investment strategy.
It is also possible to invest in indices or trackers like ETF (Exchange-Traded Funds) to be exposed to a basket of shares sorted by country, activity sector, and currency for instance. This can allow for better portfolio diversification.
However you choose to be exposed to the stock market, remember to always follow your trading, as well as risk and money management rules to better protect your trading capital and enhance your results.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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This article was originally posted on FX Empire