Faced with high inflation, rising interest rates and falling growth, the chief investment office at UBS Global Wealth Management discusses where investors should put their money in 2023.     

At a media round table last week, UBS's chief investment office said that it favors defensive, value stocks and bonds, and believes that alternative sources of diversification, including hedge funds, should continue to do well in the year ahead.

According to the bank, defensive sectors should prove insulated from slower growth. It backs consumer staples and healthcare, saying they should both offer positive earnings' growth in 2023.  

Meanwhile, value stocks tend to perform well when inflation is high. More attractive opportunities to buy cyclical and growth stocks may emerge later in the year, as inflation slows and global growth picks up, the firm said in a statement.

It highlighted that the opportunity to earn more predictable returns is appealing against an uncertain backdrop, and it favors US investment-grade bonds, select short-duration bonds, resilient credits, and sustainable bonds. It also favors quality-income stocks.

In terms of currencies, UBS prefers the safe havens of the US dollar and Swiss franc. 

With stocks and bonds failing to act as counterweight to each other’s performance in 2022, alternative sources of diversification, including hedge funds, have performed well, and will remain an important source of diversification in 2023, the bank continued. Multi-strategy funds can also offer a simple way for investors to build a diversified hedge fund allocation.

Outlining investment opportunities to capture value and growth in the decade ahead, the Swiss bank believes that prioritizing energy security, food security, and technological security by governments and businesses will be a key driver of major sectors. 

Energy security favors investments in active commodity strategies, greentech, clean air and carbon reduction, and energy efficiency. While food security should favor stocks linked to improving agricultural yields, saving water, and adapting to climate change, the bank continued. Cumulatively, smart agriculture is expected to see its market size expand by 11 per cent a year until 2030 from an estimated $13 billion today.

The long-term performance of sustainable investments also remains strong, and sustainability can be a key driver of corporate performance. However, investors need to pay particular attention to diversification by sector, style, and asset class, the bank said.

Finally, private market investments not only help with portfolio diversification, but putting fresh capital to work in private markets in the years following declines in public markets has historically proven a rewarding strategy over the long term, the firm continued. Strategies that can take advantage of price dislocations are a compelling option for investors wanting to build up their exposure to the asset class.