Actions to consider in 2023: Three City experts give their advice

After a difficult year, investors will want a more stable time in 2023. Here, our three city experts give their advice for the next 12 months. Each has recommended a stock for courageous investors who are willing to take risks and another for the more cautious.

As anyone who has dabbled in the stock markets in the last 12 months will know, stocks can go up as well as down. Following sharing advice always carries the risk of losing some or even all of your money. It is a good idea to do your own research before investing.

And for those who wish to bet on US stocks, remember that there will be additional trading costs involved, and a risky dollar strength will wipe out your gains or increase your losses.

Susannah Streeter – Senior Investment and Markets Analyst, Hargreaves Lansdown

For the cautious: Rentokil Initial (508p)

The US acquisition of Terminix, which was completed in October, placed Rentokil Initial in a dominant position in the world’s largest pest control market, offering a strong revenue stream and tremendous opportunities to build an industry fragmented.

Even if the US falls into a recession, the need to deal with troublesome mice, rats and insects is not going to go away and is considered an essential service, likely to be protected in a recession.

Hygiene standards never diminish, and as nations grow, so does the number of pests. Its US pest control division faced tough benchmarks from the previous year, when growth was nearly 10 percent, but the savings from the Terminix acquisition should start to shine through.

There is a risk that these combined benefits may not emerge as quickly as expected, or that other obstacles may arise as the operations merge.

However, the group’s debt has fixed rates, so the company is protected from rising borrowing costs.

Susannah Streeter

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For the brave: DS Smith (322p)

With concerns about a recession in e-commerce, investing in a company that supports the industry could be considered a rash gamble.

But packaging firm DS Smith has shaken off concerns with strong results and full-year trade will beat expectations. This is an enviable position to be in, given that inflation is causing other companies so much pain.

Although e-commerce sales have been down due to the rise of the pandemic, its products are in high demand by a large number of retailers. Its success has been fueled by strategies that include cost-cutting initiatives to preserve margins and pass through the higher cost of raw materials into its prices, which so far have not been hard for its customers to swallow.

Of course, there is always the risk that they will resist the prospect of further price increases, but with inflation showing signs of abating, it should keep DS Smith out of the eye of any storm.

Andy Bell – Co-founder, AJ Bell

For the cautious: GSK (1438p)

Uncertainty around the recession, inflation and interest rates means that investors may want to seek comfort in defensive companies, that is, those whose products and services are in demand in both good and bad conditions.

Healthcare is a sensible place to look for opportunities and pharmaceutical group GSK is an attractive stock trading at a cheap valuation. Its shares are at 9.9 times forecast earnings for 2023, below the FTSE 100’s 13.7 times and well below its peers.

GSK makes specialized medicines and vaccines. In November, it raised its annual earnings and sales guidance for the second time in six months, suggesting good momentum is in the business.

Stocks have been depressed due to ongoing litigation in US courts over claims that the heartburn drug Zantac causes cancer. In early December, a US judge threw out these claims, helping to revive the share price.

That doesn’t mean stocks are risk free. Appeals are possible and there is no guarantee that new drug developments will be successful.

andy bell

For the brave: JD Sports (126p)

Given its excellent track record, the valuation of JD Sports shares is attractive to those willing to take some risk in 2023.

A nearly 50 percent drop in the share price this year means that the difficult consumer context has already been taken into account. As of July 30, 2022, the company had a £1 billion net cash position, which should sustain it through a difficult period.

The seller of sneakers, tracksuits and other sports and leisurewear is operating around nine times forecast earnings for the fiscal year through January 2024 and could do better than current estimates suggest if the recession turns out to be shorter than what was feared

Why are stocks so cheap?

Concerns about consumer spending are one part of the answer. JD has also been affected by the flow of negative news related to governance problems under former boss Peter Cowgill, whose successful tenure made the company a stock market darling.

However, new boss Regis Schultz has found success at previous employers with strategies of going digital and selling products through a variety of different channels.

Looks good.

Zoe Gillespie – Senior Investment Manager, RBC Brewin Dolphin

For the wary: Microsoft ($239)

This American company develops and supports software, services, devices, and solutions around the world.

Its ‘productivity and business processes’ arm offers a wide range of services, including Office/365 and Teams, and accounts for about a third of revenue.

The ‘smart cloud’ division encompasses the rapidly growing Azure business, which is expected to drive revenue growth in the coming years.

The ‘most personal computing’ segment includes devices and games. In particular, the proposed purchase of Activision Blizzard for $69bn (£57.1bn) is seen as a future growth driver.

zoe gillespie

It is also becoming a major player in digital marketing, which should fuel future revenue streams. High US inflation has affected more growth-focused companies like Microsoft as the Federal Reserve has raised interest rates to combat inflation.

However, US inflation appears to have peaked and the speed of rate increases is expected to slow, providing a more secure outlook for 2023. Fundamentally, Microsoft is in a great position and should be able to weather the storms of any looming recession.

For the brave: Estee Lauder ($248)

Estee Lauder manufactures, markets and sells skin care, makeup, fragrance and hair care products. Its products are sold in more than 150 countries and include high-quality brands such as Clinique, La Mer, and Jo Malone.

2022 has been a difficult year as China’s zero-covid policy undermined sales growth of prestige beauty products.

The Asia-Pacific region had been driving growth, but it weakened during the pandemic.

Interestingly, supply issues seem to be more of a factor than reduced demand and that has led to more distribution centers opening in China to increase supply across the region.

The stock price has shown some signs of recovery and has been particularly sensitive to news about the easing of Covid rules in China.

In the longer term, the high quality of the brand portfolio underpins the company’s fundamentals.

2022: A YEAR TO FORGET

Stock markets around the world struggled this year as interest rates rose and riskier investments fell out of favor.

Unfortunately for our stock pickers, there were plenty of losers: All six stock tips lost value.

There was little to talk about with telecom giant BT and miner Cadence Minerals, both recommended by Justin Urquhart Stewart, underperforming.

BT was criticized by French investor Patrick Drahi, who increased his stake but has yet to outline his plans for the future. It is a business with little direction at present.

Similarly, Andy Bell had little to celebrate after he suggested Speedy Hire and Costco Wholesale. Janet Mui tipped Ashtead and Intercontinental Exchange but, again, neither stock turned a profit.

US-focused industrial rental group Ashtead looked likely to do well, but, as in the UK, the US economy has yet to come back to life post-pandemic.

Let’s hope for a better 2023.