A Deep Dive into Q2 2023's Investment Opportunities

Experienced investors frequently approach the markets with a long-term perspective and use volatility in the short- and medium-term to invest in the themes they predict will succeed over the long run. Even though it can be challenging to spot these trends, ignoring the noise can help you see what's next, which could lead to huge rewards.

Here are the top five investment trends at the moment, including several that have a lot of room to develop through 2023 and beyond.

1. A.I.

Artificial intelligence (AI), which was previously just imaginable, has gained prominence in society as a result of the technological revolution. Because AI is transforming so many facets of our life, it has the potential to dominate the economy for the next hundred years.

According to market intelligence source International Data Corporation (IDC) analysts, the AI market might generate $900 billion in global revenues by 2026, with a compound annual growth rate of 18.6 percent between 2022 and 2026.

AI's primary goal is to more accurately and quickly mimic human intelligence. With its uses and applications affecting almost every industry, AI is gaining strength as computers and other technologies become more intelligent.

Consider ChatGPT, a sophisticated chatbot that can quickly write complex human-like prose, or DALL-E 2, an AI system that employs machine learning techniques to create realistic visuals and art from text.

The technology is already widely used, whether it is in self-driving cars, robo-advisors, or drug discovery studies.

Exchange-traded funds (ETFs) provide a practical and convenient way for the majority of ordinary investors to participate in AI stocks. Consider these three: ARK Autonomous Technology & Robotics ETF (ARKQ), ROBO Global Robotics and Automation ETF (ROBO), and Global X Robotics & Artificial Intelligence ETF (BOTZ).

2. Rising interest rates

The Federal Reserve has raised interest rates to their highest level since 2007 in an effort to combat inflation, and it has hinted that further rate increases may yet be forthcoming.

According to past experience, certain economic sectors do well when interest rates are rising. When it comes to financial institutions, for instance, even a minor increase in interest rates might result in billions of dollars in more revenue from interest-bearing loans. However, as long-duration assets they owned have suffered due to the rise in interest rates, some banks have recently come under pressure due to unrealised losses in their bond holdings.

Cash-rich businesses with little debt are another category that frequently reaps the rewards. These businesses get larger yields on their cash reserves when yields climb. The S&P 500's technology and healthcare companies frequently have the largest cash reserves because many of them save money for strategic buyouts and other expansion opportunities. But in 2022, tech stocks suffered greatly as even the biggest brands experienced a dramatic decline in share prices as the Fed tightened monetary policy.

ETFs like the Financial Select Sector SPDR Fund (XLF), Health Care Select Sector SPDR Fund (XLV), or Technology Select Sector SPDR Fund (XLK) are options for investors looking for exposure to these industries.

3. Income investing

Investors can once more focus on generating respectable rates of return on fixed-income assets thanks to the recent increase in interest rates as a whole. Most people became accustomed to earning nothing on their savings and short-term investments during the period of low interest rates. But today, some CDs pay over 5% and high-yield savings accounts offer approximately 4%.

High-dividend stocks or dividend funds are options for investors who want to make money while still having stock market exposure. These investments offer respectable dividend yields and have the potential to increase in value if the underlying businesses perform successfully. You should think about the Vanguard High Dividend Yield ETF (VYM) and the Schwab US Equity Dividend ETF (SCHD).

Income from assets like this can either provide extra money for discretionary spending or assist in navigating through periods of high inflation. Make sure your funds are producing a respectable rate of return; that choice hasn't been available in a very long time.

4. Inflation protection

The U.S. Labour Department's numbers show that inflation is still close to its highest level since the early 1980s, pushing Americans to pay more for a wide range of goods. Investors are seeking strategies to protect their spending power due to the rising cost of living, especially since experts don't anticipate inflation to return to normal levels for at least another year.

Two straightforward methods to shield your funds from growing inflation prices are Treasury Inflation-Protected Securities, or TIPS, and Series I Bonds. These securities are issued by the U.S. government, whose yields are determined by the level of inflation. For instance, the par value of TIPS increases in line with inflation, however the variable interest rate on I Bonds does not. The interest yield on I Bonds is currently 6.89 percent, but it might change by the end of April.

Long-term evidence also supports the effectiveness of stocks as an inflation hedge. Companies with pricing power can gradually raise their profit margins or even retain them by passing on rising costs to their customers. However, in the short term, worries about continuous inflation may frighten investors and lead to a decline in stock prices.

In times of inflation, investors frequently look to gold as a store of value. Gold does not, however, provide any income for its owners, unlike stocks. Instead of getting bigger dividend payments over time like you would with a diverse stock portfolio, you won't.

Investors can either purchase actual gold or make investments utilizing ETFs like the SPDR Gold Shares (GLD).

5. ESG investing

The global pandemic's disruption and unpredictability sparked a resurgence of enthusiasm among investors, customers, and workers to support businesses that place a high priority on environmental, social, and governance (ESG) issues. These businesses have decided to prioritize long-term value development over short-term earnings in addition to profits.

These decisions seem to be paying off. In the fourth quarter of 2022, ESG investment inflows increased to $37 billion, with total assets invested reaching nearly $2.5 trillion, according to Morningstar.

Shares of sustainable firms often exhibit greater resiliency than those of their counterparts due to their adoption of ethical business practices.

For instance, according to research from Bank of America, shares of companies with good ESG practices are typically less volatile, have greater three-year returns, and are less likely to go bankrupt.

ETFs like the iShares MSCI USA ESG Select ETF (SUSA), which monitors an index of highly rated ESG companies, are one method to invest in socially responsible businesses. American Express (AXP), Accenture (ACN), Disney (DIS), Home Depot (HD), and Hasbro (HAS) are a few of the companies on the list.

Organizations with a purpose aspire to set the tone for a better future. These companies are reinventing the function of business in society by concentrating their efforts on lowering carbon emissions, cutting waste, addressing social issues, and promoting equality, equity, and inclusion, among other admirable causes.