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Tax loss harvesting: which sectors to rotate into in 2023


Tax-loss harvesting is the process where investors sell their loss-making positions in order to off-set these losses against the potential capital gains tax they might have to pay on any winning trades. This is not something investors with tax friendly structures like ISAs need to worry about, or if you are trading financial spread bets, but for investments outside tax-friendly wrappers, it is a common tactic at the end of the tax year.

Most investors wait until the end of the year to do this and it can be an important tool for reducing overall taxes. It can reduce the severity of the loss because you are making some of the money back by mitigating against tax. Much will also depend on which country you live in, and how that country treats CGT.

Investors will be wondering whether now is the time to dump some of those loss-making positions. During the last 11 hiking cycles, eight ended in a recession – giving evidence that central banks tend to increase rates to the point where something in the market snaps and the economy breaks.

With terminal rates at around 5.0 – 5.3%, the Fed could gradually slow its pace of tightening as inflation continues to decline. This tax loss harvest season, investors should be repositioning their portfolios for a probable recession in 2023 — with possible outperformance in a small number of sectors.

  • Healthcare – safe-haven investment with a history of stable revenue and earnings, very recession resilient
  • Energy – massive profits in 2022 thanks to geopolitical uncertainty and price surges has plenty of runway in this phase of the economic cycle
  • Precious Metals – a classic inflation hedge, less volatile, diversifier and outperforms fiat money

“Utilities, healthcare and consumer staples (defensives) tend to outperform during recessions – I expect this to be the same as global growth remains muted in 2023,” said Oktay Kavrak, product strategist with Leverage Shares. “Overall, I’d prefer US large caps as they offer both defensive positioning and growth over EM (emerging markets) stocks. I also would not count out energy – something that remains top of mind globally.”

Kavrak says investors should continue to avoid higher growth areas for the time being, like tech and communications services that are likely to struggle in a ‘higher-for longer’ rate environment. “I would be very cautious about adding risk in 2023 until we see effects of the 2022 rate hikes start to play out – rise in unemployment and lower retail sales,” he said.

Nowadays 9 in 10 of the S&P 500’s total assets are intangible – a trend that has steadily increased throughout the decade. Leverage Shares expects this to revert for the foreseeable future as the conversation shifts (back) from ‘Big Data’ to ‘Big Oil’ and from ‘NFT’ to ‘LNG.’

With these as the overarching trends, Kavrak says there are a number of other sectors investors should look at rotating into in 2023:

  • Cybersecurity and defence (as countries ramp spending on defence and national security)
  • Renewables (as we focus on a decarbonized future)
  • Broad commodities/hard assets, inflation beneficiaries (due to continued global scarcities of raw materials)

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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