How we’re positioning portfolios going into 2023

Nutmeg Investment team

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This month, we’ve made some changes to the Fully Managed and Socially Responsible portfolios to reflect our current perspective on markets and the macroeconomic environment as we enter 2023. Here we outline the changes we’ve made and our positioning for the months ahead. 

Overall, economic activity among major economies continued to slow in November and early December, reflecting the impact of high inflation on demand in developed economies. The gradual easing of Covid restrictions in China should be positive for its economy and the surrounding region, despite high chances of further outbreaks.  

We’ve adjusted the portfolios among the different risk levels to incorporate these latest developments in economic conditions and the potential impact on financial markets next year. 

What have we changed? 

We’ve reduced our equity holdings across the portfolios and increased our exposure to fixed income assets via corporate bonds. In some higher-risk portfolios, this increase was done with high-yield bonds, which offer the potential for higher income though with a higher level of volatility given the trade off with investing in lower-quality credit. We’ve also trimmed our US equity exposure in favour of emerging markets.  

Taken together, these changes update the portfolios’ risk-exposure in recognition of tepid economic growth, as the global economy continues to navigate the opposing effects of real income shocks and economic reopening after Covid.  

Why have we made these changes? 

We’ve reduced our equity holdings slightly because we think that slower economies and elevated, inflation will continue to create a challenging environment for companies and their earnings (profits) in 2023.   

We’ve increased exposure to corporate bonds because we think that, after a very tough 2022 for fixed income (or bond) assets generally, value has returned to this sector with much higher yields than 12 months ago. Many corporates improved their balance sheets during the period of low interest rates at the height of the pandemic, improving their ability to repay their debts consistently even in a slowing environment. Alongside government debt and equities, corporate bonds also bring more balanced exposure to risk in the portfolios.    

Specifically, we’ve used some cash to add to our position in UK corporate bonds, which we think are currently more attractive than UK government gilts  given ongoing concerns over current Inflation and the strength of the domestic economy. 

From a regional perspective, we’ve decreased our exposure to US equities.  As the Federal Reserve – the US central bank – keeps rates at an elevated level, the earnings environment will likely remain challenging in a local market richly valued. Given this view, we’ve trimmed our holdings in the preeminent S&P 500 index and took profit on our positions in a US financials ETF, holding banks and insurance companies.   

We’ve used part of the proceeds to increase our exposure to emerging markets; a reopening of the Chinese economy could give China and its neighbours a direct boost and indirectly benefit commodity exporters like Brazil or South Africa. After three years of Covid restrictions, we do not expect the reopening will be all smooth sailing, but the relaxation of restrictions will boost domestic growth and allow China to re-engage more with the global economy.  

Our view on… the US 

In the US, we’re seeing some evidence that general inflation might have peaked even though the ‘stickier’ elements (like housing rents and other consumer services, where prices tend to change slowly) remain elevated.  

The Federal Reserve seems more concerned with core rather than headline inflation. Stubborn inflation in some core sectors is likely behind policy makers’ recent statements that they will target a moderately higher base rate of interest next year compared to their forecast three months ago.  

With tighter monetary policy, we are becoming more cautious on the US economy and equity market. Elevated valuations and earnings expectations also support this caution. It’s notable, however, that the Federal Reserve’s own economic projections are not for a recession; 0.5% real growth is projected for 2023 and 2024. We have moved our global equities and the US equities holdings to a slight underweight, which we think is appropriate given the outlook and current valuations of the US equity markets.  


The economic headwinds faced by China are improving as Covid restrictions are being eased. The economy still faces significant challenges caused by a property bubble, but the upside potential coming from a rebound in domestic consumption could be substantial.  

We don’t expect Chinese authorities to backtrack on Covid policy even though the transition to full mobility could prove difficult. From an equity valuation standpoint, China and emerging markets are seen as cheaper, having fared worse over the Covid crisis.  

Conditions are improving, and we have raised our emerging markets exposure as a whole (with Chinese equities the largest component of the basket). China’s reopening domestic economy is expected to be a key driver of returns in this area going forwards.  


In the UK, inflation remains elevated at 10.7% (November 2022) and appears fairly steady for the time being. We are seeing demand across the economy slow, notably in the housing market, which was expected given the impact of rate rises on mortgages – on 15th December, the Bank of England raised its bank rate to 3.5% increasing the pressure on borrowers.

The Bank and the independent Office for Budget Responsibility both expect a relatively ‘mild’ recession through 2023. This means that the cut in output is not forecasted to be as deep as recent past recessions. As many companies in the FTSE 100 earn their revenue overseas, there is a distant link between the performance of UK markets and the state of the domestic economy. We think the FTSE 100 continues to remain attractive on a long-term basis, and we continue to maintain our preference to larger, blue-chip UK companies, rather than more domestically focused medium and smaller companies.   

Europe and Japan  

We continue to keep an underweight allocation to European equity markets as the war in Ukraine continues to have an impact and valuations remain less attractive than UK markets. Further afield, we’ve recently adopted a neutral standpoint on Japan, reflecting the ongoing positive impact of the weak yen and the recovery in global trade, which is favourable to the Japanese equities.  

Cash and currencies  

Our cash level is higher than normal across the portfolios, funded by our underweight positions in fixed income and equities. 

Lastly, we have reduced our exposure to the US dollar and moved to underweight after a very positive 2022 as the Federal Reserve is getting closer to peak base rate. We therefore expect to see the dollar be less attractive going forward. 


Overall, we’re adopting a slightly more defensive approach as we enter 2023.  

We have increased or maintained our exposure to cheap equity markets (UK and emerging markets), limited our exposure to expensive ones (US equities), and steered portfolios towards more high-yielding assets like investment-grade and high-yield corporate bonds.  

Our approach is designed to ensure your portfolio remains positioned to benefit from financial market returns in a more tepid economic environment where policy makers are encouraging slower growth.   

If you’d like more detail on how we are positioning the portfolios, or the themes we think will shape your returns in 2023, you can find more detail on these topics and more on our blog Nutmegonomics. 

Risk warning 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance 


Nutmeg Investment team

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