3 areas of the stock market that could outperform this year

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When we think about diversifying a stock portfolio, I feel that one of the best ways is to invest in different sectors. This can help to provide returns in good times and bad, and help to reduce risk. For example, higher oil prices might be bad for an airline operator, but it’s good for a commodity company. Here are some sectors from the stock market that I think could do well this year.

Higher margins, higher revenue

The first area is finance. High interest rates around the world over the past year have been positive for the sector. They help traditional banks to make larger margins from the interest rate paid on cash deposits versus what they can charge on loans. This is referred to as the net interest margin, and is a key source of revenue for the banks.

Granted, high interest rates can increase the risk of bad debt and defaults. This is something to be aware of, but I feel the benefit of the larger net interest margin offsets the risk.

Pushing on from a bumper 2022

Commodity stocks are also on my radar as a good place to be this year. We’ve seen the gold price do very well in recent months, flirting with levels above $2,000 per ounce. This is positive for gold mining companies.

As for oil, the 6% fall in the price of crude in the past month hasn’t helped stocks linked to this commodity. The movements in the oil price will be something that I’ll be keeping a close eye on.

However, the record profits many enjoyed over the course of the past year allows for more internal investment. It has helped to pay down debt and strengthen the balance sheets for firms in the sector. Therefore, I feel they’re in a strong position going forward.

An income investor’s candy shop

Historically, the utilities sector was steady, if a little boring. The energy price shocks last year put a lot of strain on businesses. Some outperformed, while other smaller energy providers went bust.

Things have settled down now, and I expect a much smoother 2023 ahead. As companies in this area are starting from a low benchmark in terms of expectations, I feel it could be relatively easy for these stocks to outperform.

Not only that, but the dividend yields on offer (partly due to lower share prices over the past year) are attractive. This could see an influx of income investors join the party, pushing the share prices higher still.

How to invest in these areas

Within the FTSE 100, there are plenty of stocks in these sectors. From finance this includes NatWest Group and HSBC. As an idea for a gold stock, my favourite is Fresnillo. Finally, National Grid is a solid utility stock that currently has a dividend yield of 5%. This is comfortably above the FTSE 100 average yield.

The post 3 areas of the stock market that could outperform this year appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo Plc and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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