In 2023, central bankers have continued to dictate markets’ moods. However, the US economy has been very resilient, thanks largely to consumer strength. Growth and tech stocks have benefitted from the excitement around generative artificial intelligence (AI) and inflation has been trending down around the world. These all set the scene for a strong H1 2023 equity rally, albeit a narrow one. Looking to the rest of the year, the International Monetary Fund and World Bank have upgraded their economic outlooks for 2023, but growth expectations remain downbeat for the next few years. The latent effects of the unprecedented rise in interest rates in developed countries should also start to appear, leading to increased uncertainty.

However, with uncertainties come opportunities. In our recently published Investment Outlook, we have provided insights across different asset classes which has allowed us to identify 6 investment themes and potential opportunities for the last few months of the year and beyond.

US equities are the belle of the ball
The first half of the year saw one of the narrowest rallies in history with only 25%¹ of US stocks outperforming the S&P 500. As the market regime transitions, it should provide a ripe opportunity for market breadth to improve. Markets may begin to favour value, dividend-paying and dividend-growing stocks. Despite the risk still ahead, and rates ‘higher for longer’, the US equity markets are still better positioned than other regions with the US’ service-based economy, consumer strength, and large fiscal stimulus.

In such a context, the WisdomTree US Quality Dividend Growth UCITS ETF could provide an interesting solution for investors looking to invest in the US. The exchange-traded fund’s (ETF’s) portfolio is constructed around dividend-paying companies with the best-combined rank of earnings growth, return on equity and return on assets within an ESG-filtered universe of companies with sustainable dividend policies. Stocks are also risk-tested using a proprietary risk screen (Composite Risk Score), which uses Quality and Momentum metrics to rank companies and screen out the riskiest companies and potential value traps. Each company is then weighted based on its cash dividend paid (market capitalisation x dividend yield), which introduces valuation discipline in this high-quality portfolio. Those steps, in combination, deliver an all-weather strategy that can be used as a strategic holding to weather market volatility.

‘There is no alternative to equities’ in Japan
Japan has emerged from the COVID-19 lockdowns with a faster pace of growth and higher inflation. A combination of higher equity risk premiums, a weaker yen (supportive of the Japanese export market), corporate reforms, and attractive valuations have been important catalysts for equities. Japan’s nominal growth trend is expected to remain above 2% over the medium term, following the near 5% surge in 2023². The Tokyo Stock Exchange’s (TSE) recent corporate policy announcements are likely to pressure Japanese corporates to funnel excess cash reserves into higher payout ratios. Furthermore, recent earning revisions have been very positive in Japan, well ahead of other regions.

With a portfolio tilted toward exporters, the WisdomTree Japan Equity UCITS ETF, by using hedged share classes, offers an interesting opportunity to invest in that market and reap the benefits of not only a weaker yen but also the corporate governance reforms. The WisdomTree Japan Equity UCITS ETF enables investors to gain a broad-based exposure to dividend-paying, export-oriented companies that meet WisdomTree’s environmental, social and governance (ESG) criteria. Export-oriented companies are defined as those companies that derive at least 80% of their revenue from countries outside Japan.

Turn in the economic cycle, cyclical recovery
Many indicators point to the global economy being deep into a recovery phase. Equities have already benefitted from a strong rally this year but commodities, as a late-cycle performer, have yet to turn decisively.

In that context, investors could benefit from a smart exposure to broad commodities with the WisdomTree Broad Commodities UCITS ETF or the WisdomTree Enhanced Commodity UCITS ETF depending on their risk budget. The WisdomTree Broad Commodities UCITS ETF closely tracks the benchmark Bloomberg Commodity Index (BCOM) but, unlike other BCOM-trackers, it uses an innovative replication method which includes direct exposure to spot prices for the precious metals portion of the index rather than synthetic. The WisdomTree Enhanced Commodity UCITS ETF is a core commodity alternative to the Bloomberg Commodity Index (BCOM). It invests in the same commodities and rebalances yearly to the same weights as the BCOM but seeks to systematically enhance the risk return profile by using the shape of individual commodity futures curves to optimise returns.

Greenflation
With the Ukraine War and the subsequent energy crisis of 2022, finding energy solutions that are both sustainable and geopolitically secure is becoming the next paramount objective for countries around the world. This ‘green arms race’ is evident in the avalanche of green fiscal packages, including the Inflation Reduction Act and REPowerEU. The energy transition will demand a huge amount of raw materials like copper or lithium and so there is the potential for ‘greenflation’, that is, the rise in the cost of commodities tied to the energy transition.

WisdomTree provides two innovative solutions to invest in this theme via two commodity basket ETFs, focused on metals that are key to the energy transition: WisdomTree Battery Metals and WisdomTree Energy Transition Metals. Both exchange-traded products (ETPs) possess two features unique to the European markets:

• The baskets invest in both lithium and cobalt future contracts, that is, the metal itself and not miners.
• The weights of the metals are reviewed by Wood Mackenzie (a global research house for renewables, energy transition and natural resources), based on proprietary models tied to the evolution of the energy transition.
• WisdomTree Artificial Intelligence UCITS ETF, created in partnership with the Consumer Technology Association, the trade association representing the $505 billion US consumer technology industry and organiser of the Consumer Electronics Show (CES) in Las Vegas.
• WisdomTree Cloud Computing UCITS ETF, created in partnership with Bessemer Venture Partners (BVP), a leading venture capital firm in the industry.
• WisdomTree Cybersecurity UCITS ETF, created in partnership with Team8, a venture group whose leadership team includes unicorn founders, bank and fintech CEOs, and former leaders of Unit 8200, Israel’s elite military technology and intelligence agency.

The large-cap crypto season is upon us
With the filing of spot Bitcoin ETF in the US by large asset managers, including historically sceptical ones like BlackRock, market sentiment has definitively turned for crypto. This year the large cap crypto assets (Bitcoin and Ethereum) have performed very strongly. We also observe that the sequence of events needed for another bull run in crypto are appearing:

• integration with traditional payment processors
• blockchain scalability
• better user interfaces all moving forward quickly

Also, the Ethereum network successfully transitioning to proof-of-stake and delivering staking yield provided another incentive for institutional investors to move into the space.

Investors could gain exposure to the 2 crypto giants through WisdomTree’s physically backed ETPs, offering world-class security and competitive cost of ownership:

• WisdomTree Physical Bitcoin
• WisdomTree Physical Ethereum

Visit our website for the full Investment Outlook and related products.

¹ WisdomTree, Bloomberg. 30 December 2022 to 31 July 2023.

² International Monetary Fund, October 2023.

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