As we enter 2023, uncertainty remains the watchword for businesses. From a resurgent Covid in China to inflation and rising interest rates in the West, tipping stocks has rarely been harder. Our portfolio picks have a distinctly defensive theme, with dependable dividends, utilities and discount retail being a feature, although some are pitched to benefit from a potential economic rebound.
XP Power
Jim Armitage
I’m expecting a year of two halves — glum for the first six months or so, but with a US-led improvement from the summer. That left me hunting for a stock with a safe dividend, but also a bit of va-va-voom when the pick-up emerges.
Take a bow, XP Power, whose power converters are vital parts of the machines that make semiconductors, industrial robots and critical hospital equipment. It had a rotten 2022, marked by supply chain issues and a $40 million defeat in a US patent battle. The shares ended the year down more than 60 per cent. However, I’m hoping the supply issues will ease in 2023 — albeit after a bumpy start given China’s Covid outbreak — enabling the company to fulfil its record order book and fund its dividend (it currently yields 5 per cent).
XP Power offers stable revenues from healthcare and the prospect of strong growth from chip kits, particularly in the US, where the government is promoting home-grown manufacturing.
Burberry
Sam Chambers
I’m betting on a home-grown revival at Burberry, where chief executive Jonathan Akeroyd and fêted creative director Daniel Lee are on a mission to recapture the brand’s Cool Britannia heyday.
Bradford-born Lee has been drafted in to overhaul Burberry’s higher-margin accessories business after his bags transformed the fortunes of Bottega Veneta. His first collection for Burberry will be unveiled in February at London Fashion Week. And then there is the reawakening of China, where the government’s long battle to contain Covid crushed spending on luxury goods in one of Burberry’s key markets. The mess should begin to clear this year after an easing of draconian restrictions, paving the way for a recovery in spending among cooped-up Chinese consumers, who will also happily reacquaint themselves with Europe’s luxury boutiques when they are free to travel overseas. Looking west, Burberry also has plenty of exposure to America, which looks set to power out of the global downturn quicker than Europe.
Rivian
Danny Fortson
The electric car revolution is gaining speed, and Rivian is a good way to bet on it. The maker of electric trucks and Amazon delivery vans had a bad 2022, its stock plunging 80 per cent and closing last week at $18.43 to give the company a $17 billion (£14 billion) valuation. Bears will say this is still too high, And to be sure, typical valuation metrics do not apply here; Rivian is on track to rack up more than $7 billion in losses this year. Rather, this is a bet on the future. The company made about 25,000 vehicles last year — its first of real production — and it has enough cash, $14 billion, to stay afloat as it ramps up. And as we have seen with Tesla, once manufacturing starts at scale, the finances improve dramatically.
Rivian’s vehicles have won a ton of awards, while its trucks, SUVs and vans have an order backlog of more than 200,000. The task now is to nail manufacturing. That would be no small feat, but I’m betting on founder RJ Scaringe to pull it off and create the next great American car brand.
SSE
Jamie Nimmo
After a strong run, shares in SSE have lost some of their spark over the past year, in part due to volatile energy prices and windfall taxes. But I’m backing the energy giant to get back on track in 2023.
Chief executive Alistair Phillips-Davies has made a strong case for keeping the two parts of SSE together (renewables and old-fashioned divisions such as electricity transmission and power stations). He managed to sell off 25 per cent of its transmission arm for £1.5 billion last year and he has similar plans for its electricity distribution division early this year.
Windfall taxes have added a layer of uncertainty, but SSE feels like one of the few big British businesses investing heavily in energy security — and it could reap the rewards in the coming year. There is also the possibility of a buyer coming along. Could a big oil company such as Shell or BP make a proper push into renewables by acquiring SSE?
Segro
Oliver Shah
When I tipped Segro a decade ago, a reader wrote in to say I must have been bribed with beery trips to the rugby. There could be no other explanation, he implied, for my decision to back the unsexy property company formerly known as Slough Estates. As it turned out, Segro returned a respectable 19.4 per cent in 2012 — and it went on to be an even better long-term hold, its shares multiplying more than sevenfold as its industrial sheds were rebranded logistics assets and booming online retailers replaced metal-bashers as tenants.
That run came to a screeching halt last year as the cycle turned and Amazon, the king of logistics occupiers, warned it had “too much space right now”. Segro’s shares crumpled. At 763.6p, they now trade at a 37 per cent discount to its assets — an unfamiliar position for investors in recent years.
I think property companies have been oversold in general, and Segro is looking very cheap in particular. The underlying business continues to grow — in the third quarter, it renewed rents at an average 22 per cent premium — and although there will almost certainly be valuation write-downs, they are already more than priced in. Private equity giant Blackstone is the dominant player in this space, meaning Segro is the only listed player of real scale. Ten years on, it’s worth another punt.
Dunelm
Lucy Tobin
It feels counter-intuitive to back retail when money is tight, but the homeware specialist Dunelm has good-value products in cheap, out-of-town locations — a formula that last year helped sales rise more than 40 per cent on pre-Covid 2019 as the company grabbed market share from rivals. Another factor in Dunelm’s favour is that chief executive Nick Wilkinson — while controversially remunerated — is a safe pair of hands at the helm, overseeing a brand that now appeals to interiors-obsessed Instagrammers as well as older buyers. More importantly, Dunelm’s dedicated in-store staff impress too. Finally, the shares themselves are fairly cheap, trading at just over 11 times earnings for 2023.
Any consumer-spending stock is risky right now, and so is Dunelm — but if it keeps hitting its product sweet spots and avoiding too much of a squeeze on margins, it should fare well during 2023’s downturn.
Numis
Jill Treanor
The past 12 months have been terrible for the City. Russia’s invasion of Ukraine caused so much uncertainty that investors had no appetite for new listings. In the first six months of 2022, there were just five floats on the London Stock Exchange, compared with 37 in the same period a year earlier. It should be no surprise then that the share prices of the niche investment banks supporting such floats have had a hard year — with Numis down more than 40 per cent. While few in the City are brave enough to predict an upturn in activity much before the middle of 2023, brokers such as Numis could be well placed to benefit should that moment come.
3i Group
Jon Yeomans
Private equity did not have an easy time in 2022, with central banks hiking interest rates and bringing to a close the era of cheap money. Listed private equity group 3i delivered a total return on shareholder funds of 14 per cent in the six months to September 30, down from 24 per cent a year ago. Yet 3i, which has investments across Europe and North America in sectors such as industrials, infrastructure and communications, has reasons to be optimistic.
Boss Simon Borrows, who has been in the job for a decade, told analysts in November that he thought US rate rises might top out by the second quarter of 2023, boosting confidence and helping 3i achieve a string of “realisations”, or exits, this year. Borrows noted that more than 80 per cent of 3i’s portfolio is focused on the value, infrastructure and healthcare sectors, which could thrive in the tougher economic climate.
Which brings us to 3i’s ace card: it owns the European discount retailer Action, which has more than 2,000 stores across ten countries and reported like-for-like sales growth of 15.7 per cent in the nine months to October 2. A discount retailer is a handy business to have during a recession and 3i reckons there is more growth to be had by expanding the chain south and east.
How did we do last year?
After significantly outperforming the market in 2021, the challenges of war in Ukraine, surging inflation and the bursting of the technology bubble dashed all but one of The Sunday Times tips for 2022.
Like many fund managers, our team chose a clutch of tech stocks, which were all the biggest losers in The Sunday Times portfolio.
Health and beauty e-commerce empire The Hut Group ended down 81 per cent on this time last year, online gaming group Roblox fell 71 per cent, Oxford Biomedica tumbled 64 per cent and translation tech firm RWS fell 42 per cent. BT ended down 34 per cent, hit by rising costs, increased competition and strike woes, while HarbourVest Global Private Equity was buffeted by the challenges facing all PE firms, ending the year down 21 per cent. Even engineering group Renishaw, famed for its dependable share price growth over the decades, tumbled 23 per cent amid supply chain worries arising from the war in Ukraine.
However, our stock tip that won, won big. The mining giant Glencore turned in a 47 per cent leap, plus a return of $8.5 billion to shareholders in dividends and share buybacks as the Ukraine war triggered a surge in the price of coal and other minerals.
