Why going defensive backfired in 2023

If you take a look at the geopolitical concerns in 2023 that continue today, the answer should have been ‘invest defensively’. It was a mistake – but will it be in 2024?

The stalwarts of tough economic times were not the winners – for example, Healthcare mostly had a tough year, while Consumer Staples generally did well but looked expensive. Utilities and real estate varied.

The winners were, of course, those sectors that should absolutely have been counterproductive in a tough environment: Technology, Consumer Discretionary and Communications Services.

Shannon Reilly, head of equities, Pacific for Mercer notes that those fund managers with higher active weightings to these sectors were the ones to outperform in 2023.

Mercer publishes quarterly investment surveys and the December report provides an interesting insight into the Australian shares space. The report covers 141 funds across the year, with the top 10 all outperforming the S&P/ASX200 and S&PASX300 on a one-year basis and a five-year basis.

The three-year comparison tells a different story, with the bulk of the top-10 underperforming in this period – it’s worth considering how unexpected market activity was in 2021 and 2022 for stock selectors. Not to mention that 2022 included a tech bloodbath, no doubt hitting returns for fund managers weighted towards these hard.

The funds and strategies mentioned are not all available to retail investors – some may be closed to new investment or available purely to institutional investors. But they still offer interesting insights into not only how strategies performed but also how superannuation companies such as Mercer evaluate funds for their portfolios.

You'll also notice that two of the funds featured in Livewire's top-performing equity funds of 2023, which was based on our database. You can find out more about these funds below:

Managed Fund

Hyperion Australian Growth Companies Fund

Australian Shares

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Managed Fund

Greencape High Conviction Fund

Australian Shares

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Key insights for success in 2023

Growth was the name of the game in 2023, a reversal of the value trend we had seen come to play in 2022.

“The majority of the top 10 spots for the 2023 calendar year were taken by growth managers, who benefitted from exposure to companies tied to AI. This includes technology names and data centres such as Goodman Group and NextDC,” says Reilly.

Those managers who steered defensive ships found themselves struggling in the December quarter. Reilly noted that investors were steering away from defensive stocks such as consumer staples and utilities.

Perhaps one of the more unexpected sector winners was the Consumer Discretionary sector – the area where everyone tipped earnings cuts off the back of cost-of-living pressures.

“The consumer discretionary sector proved more resilient than investors anticipated going into 2023, with key names such as JB Hi-Fi (ASX: JBH) and Flight Centre (ASX: FLT) performing strongly against modest earnings expectations based on the market’s bearish view on consumer spending,” said Reilly.

Stock selection played a significant role for the top performers too, according to Reilly. 

But who will be the winners in 2024?

A big winner of 2023, technology, could be in for a rockier path in 2024 – but crystal ball gazing has been wrong before and could be again.

Healthcare, materials and real estate saw significant gains in December and have continued to thrive in the start of 2024. Fund managers with allocations towards these sectors are likely to benefit in the first quarter. But will these gains be temporary?

Healthcare after all had a challenging few years post covid, but in theory is positioned for recovery, while materials has been mixed as China’s sluggish post-covid recovery hit Australia’s biggest exports.

Markets are pricing for rate cuts – and we are also in a year of multiple elections, though the US election will be the one most keenly watched. There is a risk to markets should cuts not occur this year – or even if they do, that share prices are trading higher anyway and the cuts will force a correction.

The first quarter of the year should prove an interesting one as companies release their half-year reports in February. In its Results Outlook released 25 January 2024, Macquarie expressed concerns that optimism has pushed some stocks too far ahead of earnings – particularly in Consumer Discretionary stocks and that investors are focused too far ahead for a FY25 recovery. Healthcare remains Macquarie’s sector pick for the year.

Predictions throughout Livewire’s Outlook Series have also varied – you can download the full guide here.

For example, Elston’s Andrew McKie tipped healthcare and consumer staples as sectors to watch this year, while Pitcher Partners’ Charlie Viola likes real assets and cash.

MPC Markets’ Mark Gardner also likes healthcare, but sees financials and agriculture as opportunities. He believes defensive plays are looking cheap – and could be valuable in yet another uncertain year. 

Once again, it's shaping up to be an interesting year for markets - and anything can change in an instant. For those hedging their bets, thinking long-term and focusing on your overall strategy instead of trying to identify tomorrow's top fund can't go astray.