Where did private investors invest in 2023?

It was an uncertain year for the markets in 2023.

Interest rates rose to levels not seen in more than a decade and inflation appeared more deeply embedded than initially thought.

Still, some markets reversed the pain of 2022 as stocks rose, lifted by the performance of the tech giants dubbed the “Magnificent Seven.”

The British market had a less positive year. After a strong start that saw the FTSE 100 reach 8,000 points, the collapse of Silicon Valley Bank sent shockwaves through the index's financial stocks.

Since then, persistent inflation has sent both the stock and mortgage markets into panic over when interest rates might peak and whether a recession is on the horizon.

It reflects which stocks and funds investors have supported this year.

Investors flock to income stocks

Despite the market's choppy performance this year and tough economic conditions, investors have supported UK shares.

For UK investors, 2023 has been an earnings story. Despite the narrative that Britain is an unloved market, the preference for dividend stocks means that investors looking for a stable income stream have flocked to the FTSE.

British investors overwhelmingly backed British heavyweights like Legal & General And Lloydswhich proved to be popular on all major investment platforms.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: 'London-listed companies remain a strong draw for UK retail investors, even as the FTSE 100 continues to lag behind its international peers.

'According to net buying on the HL platform in 2023, investors are looking for stocks that offer the potential for income and solid returns, with some of the big dividend players on the list, including Legal and General, taking the number one position.'

Despite its lackluster performance – which remains flat so far – Legal & General's annual dividend yield of just under 8 percent was also a crowd-pleaser.

Streeter believes the financial services firm has been helped in part by diversifying its businesses: 'Higher interest rates have caused some problems for the assets under management of the investment management division, although things are starting to stabilise.

'But at the same time, the larger pension companies benefit from higher rates.'

Lloyds is another regular among the top shares of major platforms, despite ending the year where it started. Higher interest rates have helped boost the bank, with almost three-quarters of its total income being interest-related.

Lee Wild, head of equity strategy at Interactive Investor, says it's a “surprise.” Lloyds is back at the top of the pile amid 'higher loan defaults, disappointing credit growth, rising costs (and) margin pressure'.

And 2024 could prove tougher for the lender amid a bleaker economic outlook.

Streeter says: 'As an economic bellwether at a time when Britain is stagnating, headwinds are likely to emerge.

“The business model is more exposed to potential loan defaults, and there is a risk that these could rise further as the economy shows signs of contraction.”

Mortgages issued during the pandemic also need to be renewed at a less profitable level, which could also pose problems.

“However, current valuations may overstate risks given strong capital levels and decent asset quality,” Streeter said. 'Mortgage comparisons will also decline in the second half of 2024, which is likely to present a more positive picture.'

What other stocks were popular?

Rolls Royce is the top performer of the FTSE 100 and investors who bought this time last year will make significant gains.

The automaker is up more than 200 percent since December 2022, after new CEO Tufan Erginbiligic took the reins in the new year.

“The big story in 2023 was without a doubt Rolls Royce,” says Wild. 'This time last year the shares could be bought for less than a pound. It didn't take long for Erginbilgic to make his mark, using February's full-year results to signal his intention and begin a rapid rise in the share price into the 300p range.'

Rolls Royce is popular on most major platforms, just behind income heavyweights L&G, Lloyds and Aviva.

Elsewhere, Glencore remains a popular stock despite a difficult year for the mining company. The stock is down 14.13 percent after a significant drop in profits in the first half of the year, and commodity prices have returned to earth after a strong 2022.

Streeter says: “Bargain hunters may have taken advantage of the share price falls. Glencore has diversified its vast portfolio and has a keen eye on the energy transition with its investments in copper and nickel, which is likely to have attracted investor interest.”

Shopping for bargains

Bargain hunting has been the main theme this year, apart from income. A number of big names have suffered from the deterioration of market conditions and the increasingly uncertain economic environment.

Besides Glencore, Vodafone is a top choice among investors, despite a turbulent year that saw its share price fall almost 20 percent this year.

Wild says: 'Appointing an insider as interim CEO was not well received, and Margherita Della Valle has failed to revive the company's fortunes.

“Investors are counting on the telecom giant's performance to improve at some point, but choosing an entry point for Vodafone has been fraught with danger for several years and 2023 proved no different.”

Investors will therefore hope for a turn of fortune, but 2024 could be another difficult year.

“The company is in the process of offloading struggling divisions, such as its Spanish operations, and all options are still on the table for the Italian company,” Streeter said. 'Annual price rises have helped offset vulnerable customer numbers, so a potential move by Ofcom to stop inflation-related price rises would be a blow.'

Have tech stocks remained popular?

The so-called 'Magnificent Seven' have been the standout stocks of the year, helping the S&P 500 rise 22 percent this year, and British investors wanted a piece of the pie.

Despite a dip at the start of the year, Tesla has remained a virtual fixture in portfolios and was once again in the top 10 most bought stocks this year.

Wild says: “Investors who stayed loyal to Tesla during last year's sell-off have been richly rewarded, especially those who backed Elon Musk in early 2023 when the stock price hit a two-year low.

“Tech was the place to be, and Tesla remains the EV company we need to beat heading into 2024. Instead of panicking, Tesla enthusiasts have used every pullback to pick up more shares. It's a strategy that has produced great results, and there are no signs of Tesla's popularity waning.”

Streeter added: “The previous exuberance around Tesla is already fading due to concerns about profitability given the price cuts implemented to entice consumers amid a high interest rate environment. But Tesla's prowess in inventing new and industry-defining products simply cannot be ignored.”

Freetrade's customers mainly bought technology, with Tesla, Nvidia, Amazon, Alphabet and Apple being the most supported stocks.

Nvidia had a whirlwind year after reaching a valuation of $1 trillion (£800 million) in June, putting it close to Amazon's valuation.

The buzz around the viral chatbot ChatGPT has helped push generative AI into the mainstream. Nvidia struggled in 2022 after declining demand for its gaming chips and Softbank's failed bid for chip designer Arm.

But a stellar earnings report forced investors to reassess the potential for the chipmaker amid the AI ​​boom.

Shares are up 236 percent this year.

Bonds

In addition to shares, many investors switched to bonds, where prices fell and yields based on interest rate expectations rose to the highest level in fifteen years.

AJ Bell reports that two short-term government bonds – HM Treasury Gilt 0.25 percent (31/01/25) and Treasury Gilt 0.125 percent (31/01/24) – were the two most bought shares and bonds.

The main fund was the Royal London short-term money market.

Laith Khalaf, head of investment analysis at AJ Bell, said: 'The fact that the most commonly purchased government bonds have short maturities suggests that investors are using them as cash-like instruments, and this is reinforced by the fact that money market funds have proven equally popular.

'After many years of near-zero interest rates, it is perhaps no surprise that some investors are filling their boots, as the returns on offer look much more palatable.'

Some investors have also opted for bonds to protect their money from the tax authorities. High interest rates on fixed savings accounts leave many in a tax trap because of the interest they earn.

“While some may use government bonds as a tax-efficient alternative to savings accounts, they are riskier and more complicated, and therefore better suited to more experienced investors,” says Khalaf.