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I’m always on the lookout for stocks to buy for my portfolio. And after a challenging 2022 for many investors, I think there are plenty of opportunities to propel my portfolio into the New Year.
The 2022 correction
The FTSE 100 might not be down much over the past 12 months, but in truth the index has been hauled upwards by surging resource stocks. In an environment characterized by high inflation and recession forecasts, stocks in several sectors have suffered.
The FTSE 250 is a better barometer for UK stocks — the index is down 17% over one year.
Firms in retail, housing, and banking among other areas have slumped in the evolving recessionary environment. This is especially the case for stocks that are more UK-focused.
And faced by an unappealing operating environment, investors have shifted their attention away from these areas of the market.
Will there be a 2023 bull run?
Many of the issues facing the UK economy and British stocks are likely to remain into early 2023.
Inflation is expected to fall in 2023 and could reach the Bank of England target — 2% — in early 2024. Interest rates are forecast to remain high and fall towards 2% in 2025. But, of course, these are only forecasts.
And the recession? Well, it’s hard to tell. There are several systemic challenges facing the UK, including new Brexit-induced barriers to trade and a whopping 9m working-age Britons electing not to work — the latter is a huge challenge.
But there are positives, and forecasting from the Economic Forecast Agency (EFA) suggests that the FTSE 100 could push as high as 8,308 in March. However, the lower end of estimates suggests the index could fall below 7,000 in May.
Where am I putting my money?
I’m starting with consumer banks that are trading at discounts due to the recessionary environment but are receiving more interest revenue as rates soar.
Lloyds has the greatest net interest income sensitivity. In other words, its income is more sensitive to changes in interest rates. That’s because of its funding makeup and lack of an investment arm.
Banks are also earning more interest on their central bank deposits. In the case of Lloyds, this could amount to £200m for every 25 basis point hike by the BoE.
I’m also looking at Direct Line Group. The firm is back to writing at target margins having been caught out by claims inflation earlier in 2022. A recession will likely reduce demand for its services, but 2023 looks like being a better year for Direct Line.
I’ve recently topped up on both of these stocks.
And finally, I’m looking at growth. Li Auto is a Chinese EV maker, but the stock has slumped this year despite launching the much-awaited L9. The falling share price largely reflects the challenging operating environment in China, namely the zero-Covid policy.
The government has relaxed restrictions, and that’s positive. But Covid is likely to wreak havoc in China over the next couple of months, before life finally returns to normal. I’m looking to add Li to my portfolio, but I’m keeping an eye out for a good entry point.