Capital Group's 10 Investment Predictions for 2023

2. An Improving Economy Won't Lift All Ships

While growth stocks have come under pressure, "where the market has thrown the baby out with the bathwater, we’re continuing to focus," Romo said.

"As a growth investor, it’s essential to differentiate between companies that have reached the end of their runway or are facing stiffer competition with those that are simply in a cyclical slowdown. If you can find companies set to re-accelerate when the economy improves, you may find promising buying opportunities," he said in the report.

Streaming companies and ad-based social networks face tough new competition, so investors should focus more on profitability than in the past, according to Romo. Cloud computing growth has slowed, but that may be cyclical, as cloud company fundamentals remain strong, he said. The semiconductor industry has struggled with oversupply but may be set for a powerful cyclical recovery long-term, he added.

Romo also believes artificial intelligence is at an inflection point, and noted the pace of new technology adoption is accelerating. "We’re starting to think across a number of industries where this technology can be applied," he said.

In addition, underlying blockchain technology has applications for many industries, and smaller companies likely will leverage it, something the firm is watching closely, he said.

3. Global Champions Will Thrive on Adaptability

"Investors are concerned about de-globalization and assume it is negative for portfolios," Jonsson wrote. "It can be, but changes in trade patterns generally favor global champions — what I call industry-leading multinationals that can adjust to the changing landscape.

"The COVID-19 crisis shed light on the importance of resilience over efficiency, and companies are responding by establishing redundancies in supply chains. That’s creating opportunities for companies that help build factories and expand supply lines."

Global champions can do well in almost any environment, she said. Capital Group noted that more than 2,000 non-U.S. companies generate at least $1 billion in sales, compared with 1,451 in the U.S.

"It's more important than ever to be global," Romo said.

Investors should focus on nimble multinational companies that can respond to change, regardless of local conditions, the firm said. While U.S. equities have been almost impossible to beat for decades, partly because of the strong dollar, non-U.S. markets may finally be able to overtake them, Jonsson said. She expects to build up the non-U.S. part of her portfolio.

4. Health Care Breakthroughs Make for a Hot Market

"We are in an incredible age of discovery in health care," said Jonsson, who said she’s never seen the market this fertile in her more than 30-year career as a portfolio manager.

Both discovery pace and market sizes are growing, with companies on the verge of solving obesity and other serious conditions, she said. Resolving obesity is "pretty revolutionary" in what it can do for public health, she said, adding that personalization and digitization in health care are also exciting.

Jonsson focuses on companies with "picks and shovels" that supply everything associated with the therapy discovery process and said it’s not necessary to pick winners in the drug discovery race if you invest in their suppliers.

Gene therapy and other regenerative medicine generated $21 billion in revenue last year and should achieve $96 billion in sales by 2030, the firm said, citing figures from Statista.

5. Energy Drives an Industrial Renaissance

Four trends are contributing to an industrial renaissance, according to Capital Group:

• U.S. energy investments
• European energy security
• Supply chain reshoring
• Aerospace and defense spending

Green battery technology and deglobalization, which will require a metals-intensive shift, should bode well for metals and mining, including companies like Caterpillar, Romo said on the webcast.

Other companies that could benefit include Emerson Electric, Eaton, ABB, General Electric, Halliburton, Baker Hughes, Raytheon, Boeing, Honeywell and Lockheed Martin, the firm said.

6. Manufacturers Benefit From Reshoring — And So Do Investors

Manufacturers want to be closer to their markets, for ethical, environmental and supply chain reasons, Jonsson noted.

"It’s a theme for almost every industry and possibly why inflation will stay higher longer, and companies will benefit from it," she said. Siemens Energy, Keyence, Schneider Electric, Rockwell Automation and Parker Hannifin may be among those benefitting, the firm said.

Top destinations for companies redirecting manufacturing from China are Southeast Asia, India, Mexico and the U.S., the firm noted.

Equity portfolio manager Winnie Kwan predicted in the accompanying report that reshoring will be one of the more important investment themes in the 2020s.

7. Core Bond Funds Bring Portfolio Stability

Capital Group has been suggesting investors strengthen their core bond portfolio. Despite a disappointing performance in 2022, when stocks and bonds broke from their long-term pattern and both lost value, bonds should again play an important role in a diversified portfolio, according to the firm.

Slowing economic growth is "nirvana" for core bonds, fixed-income portfolio manager Pramod Atluri wrote in the report. "Slowing growth, declining inflation, higher yields and a Federal Reserve nearing the end of its hiking cycle all add up to a fantastic opportunity for core bond funds to generate mid-single-digit total returns and, once again, provide ballast to a portfolio," he said.

8. Company Cash Flows Face Increased Scrutiny

Credit fundamentals may return as inflation cools and rate hikes slow, according to Capital Group.

"For bond investors, finding companies that are inventing the next big thing is less important than determining if they can meet their debt obligations. For example, established social media companies may be facing stiff competition for younger users, but they are also very creditworthy when measured by profitability, free cash flow and relatively low debt levels," fixed-income portfolio manager Damien McCann wrote.

9. High-Yield Bonds Appeal to Cautious Investors

High-yield bonds in the current environment can provide attractive income, with those around 8% helping provide a buffer against bond market volatility and potentially generating a positive return, the firm noted in the report.

Shannon Ward, fixed-income portfolio manager, noted in the report that high-yield bonds are higher quality now than during the Great Financial Crisis.

"The premium investors pay to own high-yield bonds over comparable Treasurys suggests bonds are fairly valued and may widen as growth slows and consumers pull back on discretionary spending," she wrote, adding that she’s holding more liquidity than usual to take advantage of potential market volatility.

She’s also exercising some caution in case of recession.

10. The 60/40 Portfolio Model Endures

While stocks and bonds both declined for the first time in decades last year, hitting 60/40 portfolios hard, Capital Group stands by the well-balanced portfolio concept, however it’s split.

"For the first time in years, it’s possible to seek total returns in the high single digits by investing in core bonds and proven dividend-paying stocks without taking undue risk or reaching for yield," equity portfolio manager Hilda Applbaum wrote in the report.

Many core bonds now can provide a consistent return in mid-single digits, something not seen since 2008, she wrote, adding that investors willing to take on more risk might earn even higher returns from bonds.

"Traditional asset allocation is not a broken or failed strategy. It will always make sense to think about balance, diversification and risk. A one-size-fits-all approach doesn’t work for every investor. It’s about building portfolios from the bottom up that align with investor goals," she wrote.