We asked Australia's top fund managers what are the disruptive trends or themes that you are investing for in 2023, and what stocks best reflect those trends?

The most disruptive trend in markets for 2023 is interest rates. For the last 40 years, interest rates have trended down, and more specifically in the last 10 years interest rates have been extremely accommodative toward asset prices. Interest rates will disrupt investments in two significant ways; how we value assets, and what these assets earn.

Asset value is the inverse to underlying interest rates. Typically, as interest rates go up, assets prices go down, and vice versa. The US 10-year treasury bond has gone from 1% to 4% in roughly 12 months – this is a significant move.

Furthermore, as interest rates rise, it can affect businesses in several different ways. For example, those with large debts experience higher interest repayments. Interest rates can also affect the end consumer – for example companies in retail are highly exposed to consumers’ disposable income. As interest rates rise, there will be less disposable income for individuals which will put downward pressure on underlying demand. This can lead to the ‘negative jaws’ effect on profitability from lower revenue and higher costs.

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The most disruptive trend in 2023 was the shock to the supply side of the economy. This came about from a combination of Covid in China, shortages of shipping, and the war in the Ukraine. This saw prices rise and inflation spike. It also resulted in companies scrambling to find alternate supply chains to China. This has been difficult to play given it has increased the cost base for most companies in Australia. A possible play has been agriculture stocks such as Graincorp (GNC) and Nufarm (NUF) that have seen commodity prices jump because of shortages of grains and livestock. However, this trend is now correcting, and the agricultural stocks mentioned may be close to cyclical highs.

I think the big disruption to come in 2023 will be to the household budget as Covid savings run out and the full impact of this year’s rate rises flow through to mortgage costs.

I am about waiting for opportunities to present themselves. Disruptive trends can struggle to produce any cash, so it can be a case of getting on the bandwagon early and then getting off pretty smartly.

We have a positive outlook on markets into CY23. In this context we have exposure to financial platform providers such as HUB24 (HUB) and Praemium (PPS) which continue to disrupt and take market share from the more traditional larger providers.

I find it bemusing how many companies I meet with that present their investment proposal as disruptive and with an associated colossal market potential.

One significant trend (I won’t say disruption) we’re backing is that of healthier drinking. There’s been a huge surge in the demand for low-alcohol and lowcalorie beverages. We have made an investment in Mighty Craft (MCL) which holds a large stake in Better Beer, a low alcohol/zero calorie beer that has become one of Australia’s biggest new beer launches in the past decade. We feel this theme has a long way to run as younger generations move away from traditional drinking habits.

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Very much like 2022, we believe ESG trends will increasingly influence boardroom thinking, and provide opportunities for companies that are solving problems in the space. Companies that we hold that will likely benefit from this include:

• Aeeris (AER): weather forecasts, alerts and climate risk reporting;

• Energy One Limited (EOL): energy trading software;

• Advanced Braking Technology (ABV): aftermarket braking solutions for mining services;

• Laserbond (LBL): engineering services;

• DDH1 (DDH): drilling services.

Funnily enough, most disruptive trends are in financial markets as a result of a withdrawal of liquidity and higher prices for money. That will continue to restrict capital for unprofitable enterprises which offer little in the way of value to shareholders (and in some cases consumers). Most obviously, there will be a continuation of reduction in “tech bloat” where companies – large and small – that write code for no real purpose will disappear.

The way to play is to invest in the companies that are getting this message; not in those who will be at the pointy end of receiving it. Look for more mega cap tech companies getting leaner.

The other trend is where private assets (eg property in super funds) is valued at significantly higher than public market pricing. That’s not consistent nor sustainable and reduced liquidity will smoke it out. Have some interest in publicly listed property.

Interest rates. Although interest rates have risen sharply through 2022, there is evidence that they will continue to remain at elevated levels in the next year and beyond. This will be disruptive and create more buying opportunities. Conversely, it’s important not to chase stocks that are going up. Patience will continue to be rewarded. We are hunting for stocks that have strong balance sheets, plus examples of business models that allow consumers and companies to save money through effective substitution.

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