As the year rolls on, you may be wondering what next year’s stocks will look like.
Bill McMahon, chief investment officer for active equity strategies at Schwab Asset Management, sees a narrow trading range in 2023.
He expects the economic slowdown to cap the rise. McMahon likes dividends and other blue chip stocks. Consumer-oriented European stocks are also a buying opportunity, he said.
McMahon likes Nike, Diageo and Arthur J. Gallagher. And he believes active investing will make a comeback in an environment of high interest rates and inflation.
Street: What is the outlook for stocks next year?
McMahon: It will be a difficult year as fears shift from inflation to recession. Revenue growth should slow. Earnings estimates are down.
Stocks aren’t cheap yet.Yields are increasing for the first time in years [making bonds a more attractive investment]Equity markets could be range bound next year, limiting returns if not flat.
Street: What do you think are the best buying opportunities?
McMahon: Look outside the biggest names. Please be more selective. One of his trends that should continue is the strength of dividend stocks.
This is a good environment for high quality strains. That means companies with higher profits, strong free cash flow and solid balance sheets.
avoid high beta [volatile] corporates, high-multiplied stocks, and companies with weak balance sheets. This is especially true for companies whose debt is nearing maturity as higher interest rates are expected. Avoid cyclical companies.
Street: What is the outlook for technology stocks?
McMahon: We are still a little cautious.Demand for personal computers pushed forward during pandemic [and other hardware]And now the same thing is happening with software.
Businesses are streamlining budgets and figuring out what they don’t need. On the consumer side, the tech sector is dealing with the economic downturn, [which depresses demand].
Street: What is the outlook for foreign stocks?
McMahon: European equities are becoming more and more interesting.they have a lower rating [than in the U.S.] The US has outperformed for a long time. At some point it will return to average.
We prefer strains that are not economically sensitive with European stable names. Consumer staples, including pharmaceuticals, and healthcare fit that view.
Street: Please tell us your three favorite brands.
McMahon:
1. Nike (of) – Get Free Report Nike has had a rough time, but I think the brand is still relevant. It has had pricing power for a long time. It will benefit from the easing of China’s coronavirus policies. We had a lot of inventory up last quarter, and we’re doing a lot of marketing work to address that. There is a premium multiplier, but it is justified.
2. Diageo (DEO) – Get Free Report, [the liquor company that owns Johnnie Walker], high quality and diverse brands. You have pricing power. There is a trend towards premiumization and people are gentrifying. It will normalize next year [as the economy weakens]but it’s a long-term trend.
3. Arthur J. Gallagher (AJGMore) – Get Free Reportis a medium-sized insurance broker with a scale advantage in a highly fragmented sector. They provided guidance for his mid-to-high single-digit organic earnings growth in 2023. At the high end of that range, the profit margin also increases. There are also inorganic growth opportunities, such as buying smaller companies at discounted prices. A good stock to withstand an economic slowdown.
Street: Do you think passive investments will continue to take market share away from active investments?
It’s changing.Opportunity for active management when interest rates rise [because some companies are more affected by higher rates than others]Buying index funds and doing well is not easy.
Individual stocks should be preferred now. Investors should look beyond his FAANG shares – Meta Platforms, Amazon, Apple, Netflix, Alphabet].
we are in a different environment [than the one that has prevailed] Since the 2008 financial crisis.For most of that time, central banks supported investors [with low interest rates]Now central banks are turning into headwinds [by raising rates].
We need to find companies that can grow in this environment and withstand inflation and rising interest rates.
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