Investors will have to contend with many of the same themes in 2023 as high inflation remains sticky, interest rates continue to rise and a recession looms on the horizon.

However, there are also signs that the new year could be a turning point for markets, with the likelihood of a mild recession already baked into investors’ portfolios and inflation expected to moderate over the course of the year.

“Stocks and bonds have pre-empted the macro troubles set to unfold in 2023 and look increasingly attractive, and we are more excited about bonds than we have been in over a decade,” Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, said.

While the equity sell-off of 2022 has left some stocks with strong earning potential, most agree that volatility is likely to continue into the start of next year with many macro headwinds including Russia’s invasion of Ukraine and rising US and China tensions likely to play a key role.

Despite this, these headwinds could also create opportunities for several megatrends that could potentially shoot the lights out in 2023. Following what has been a tumultuous year for most asset classes, ETF Stream has selected five ETFs that could help investors manage volatility and offer outperformance.

  1. Amundi MSCI Europe Value Factor UCITS ETF (CV9)

With many banking on a recession at some point over the next year, the value trade is likely to be a popular one over the next 12 months.

One market that could be in for a change in fortunes in the next year is European equities. The continent faced some particularly fierce headwinds over 2022 with the war in Ukraine, inflation and rising bond yields driving down valuations across the market.

However, a recent note by Morningstar said this low valuation point could be a key driver for European equities in 2023, despite the likelihood it will be another year of volatility.

“The European Central Bank needs to maintain a hawkish stance on inflation, but should not overdo it,” it said. “The big unknown is how severe the recession will be in Europe.”

One ETF that could capture these undervalued stocks while shielding during the volatility is the €566m CV9, the largest value factor ETF targeting European equities.

The ETF is the second-cheapest tracking European value stocks with a total expense ratio (TER) of 0.23% and has also outperformed its peers so far this year, returning 1.34% versus -9.3% of the Morningstar Europe index.

  1. iShares $ Corp Bond UCITS ETF (LQDE)

Next year could certainly see the return of bonds following one of the worst years on record. A sharp rise in yields has driven up demand for fixed income ETFs in recent months and there are signs 2023 could see this trend continue.

The increasing likelihood of a recession will see them play a more important role in investors’ portfolios over the next 12 months and are poised to offer attractive real yields, particularly in inflation starts to fall.

Highlighting this, LQDE returned 6.1% in the month of November while investors are banking on the ETF will play a big role next year.

LQDE has recorded inflows of $1.6bn this year, according to data from ETFLogic, with $448m coming in the last two months alone on the back of easing inflation figures in the US.

  1. JPMorgan Global High Yield Corporate Multi-Factor UCITS ETF (JGHY)

Making the most of this theme, high-yield bonds could offer some very attractive returns over the next year. JP Morgan AM said the asset class is once again worthy of such a name as yields approach double digits once again.

To play this, ETF Stream has selected JGHY, which tracks the JP Morgan Global High Yield Multi-Factor index with a total expense ratio of 0.35% and combines the value, quality and momentum factors in a bid to boost returns.

With this in mind, the ETF should benefit from stabilising interest rates and with a recession likely priced in, could offer more attractive yields than its investment grade and sovereign bond counterparts.

  1. KraneShares CSI China Internet UCITS ETF (KWEB)

Could 2023 be the year of sustained growth for China tech stocks? The latest easing of ‘zero COVID-19’ suggests that investors are certainly optimistic, at least for the time being.

Following the policy change, Goldman Sachs projected double-digit returns for the MSCI China index and CSI 300 index in 2023 while Morgan Stanley upgraded Chinese equities to overweight.

Internet stocks are set to benefit hugely from the reopening due to the companies’ exposure to eCommerce, online travel bookings and already distressed valuations.

To play this theme, we have selected KWEB, which led the charge of China equities following the reopening, returning 23.3% in the week to 5 December.

As always, capturing the upside of China comes with its risks. The country is expected to have to deal with multiple waves of COVID-19 infections over the coming months while rising tensions with the US over Taiwan could severely impact the market.

  1. Rize Cybersecurity and Data Privacy UCITS ETF (CYBP)

The cybersecurity theme is often touted as the next big winner, most recently after Russia’s invasion of Ukraine led many to fear a new type of cyber-warfare and an increased need for digital security.

However, as with many tech themes, the sector’s growthy characteristics have meant high inflation and rising interest rates have made 2022 a particularly tricky year in terms of performance.

Despite this, sentiment is still strong. A recent Morgan Stanley survey of 100 chief technology officers found that cybersecurity was the least likely tech expense to face cuts in spending over the next year.

Government policy in both the US and Europe is also supportive, with President Joe Biden signing the Cyber Incident Reporting for Critical Infrastructure Act of 2022 and the European Union proposing rules for cyber hygiene.

To capture this trend, we have chosen CYBP, the joint-cheapest ETF tracking the theme on the European market with a total expense ratio (TER) of 0.45%. Tracking the Foxberry Tematica Research Cybersecurity & Data Privacy index, it has returned -21.3% so far this year.

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