Where did retail investors invest in 2023?

• Uncertain markets pushed investors into dividend stocks in 2023 
• Tech stocks, especially Tesla, remained a fixture in portfolios 
• More investors looked to the bond markets  

It was an uncertain year for markets in 2023. 

Interest rates climbed to highs not seen in over a decade and inflation appeared to be more embedded than first thought.

Yet some markets reversed 2022’s pain as equities rallied, dragged higher by the performance of the tech giants dubbed the ‘Magnificent Seven’.

The UK market had a less positive year. After a strong start in which the FTSE 100 hit 8,000 points, the collapse of Silicon Valley Bank sent shockwaves through the index’s financial stocks.

Since then, persistent inflation has sent both equity and mortgage markets into a frenzy about when interest rates may peak and if a recession is on the horizon. 

It has reflected which stocks and funds investors have backed this year.

Investors flock to income stocks

Despite the market’s choppy performance this year and the difficult economic backdrop, investors have backed UK stocks.

For UK investors, 2023 has been a story of income. Despite the narrative of the UK being an unloved market, its bias to dividend stocks mean investors looking for a steady income stream have flocked to the FTSE.

UK investors overwhelmingly backed UK heavyweights like Legal & General and Lloyds, which proved to be popular across all major investment platforms.

Susannah Streeter, head of money and markets at Hargreaves Lansdown said: ‘London-listed companies remain a big draw for UK retail investors even though the FTSE 100 has been lagging its international peers.

‘According to net buys on the HL platform across 2023, investors are seeking out stocks which offer the potential for income and solid returns, with some big dividend players in the list, including Legal and General, scooping the number one position.’

Despite a lacklustre performance – it remains flat year-to-date – Legal & General’s annual dividend yield of just under 8 per cent has also been a crowdpleaser.

Streeter thinks the financial services group has partly been helped by the diversification of its business: ‘Higher interest rates have been causing some trouble for assets under management from the investment management division, though things are starting to stabilise. 

‘But at the same time, higher rates are benefiting the larger pension businesses.’

Lloyds is another regular feature in major platforms’ top stocks, despite it finishing the year where it started. Higher interest rates have helped boost the bank, with almost three quarters of total income interest related.

Lee Wild, head of Equity Strategy at Interactive Investor says it’s a ‘surprise’ Lloyds is top of the pile again amid ‘higher loan defaults, disappointing loan growth, rising costs [and] margin pressure’.

And 2024 might prove more difficult for the lender amid a gloomier economic outlook. 

Streeter says: ‘As an economic bellwether at a time when the UK is stagnating there are headwinds potentially brewing.

‘The business model has higher exposure to potential loan defaults, and there is a risk these could rise further given that the economy is showing signs of shrinking.’

Mortgages issued during the pandemic are also coming up for renewal at less profitable levels which could spell trouble too.

‘However, at current valuations the risks may be being overplayed given its strong capital levels and decent asset quality,’ says Streeter. ‘Mortgage comparisons will also ease toward the back half of 2024 which are likely to paint a more positive picture.’

Which other stocks have been popular?

Rolls Royce has been the FTSE 100’s top performer and investors who bought this time last year will be sitting on significant gains.

The carmaker is up over 200 per cent since December 2022 after new CEO Tufan Erginbiligic took the reins in the new year.

‘Without question the big story in 2023 has been Rolls Royce,’ says Wild. ‘This time last year the shares could still be bought for less than a pound. It didn’t take Erginbilgic long to make his mark, using February’s annual results to signal his intent and begin a meteoric rise in the share price to within reach of 300p.’

Rolls Royce has been popular across most major platforms, just trailing the big income heavyweights L&G, Lloyds and Aviva.

Elsewhere, Glencore remains a popular stock despite a difficult year for the mining company. It is trading down 14.13 per cent after a significant drop in profits in the first half of the year, and commodity prices fell back to earth after a strong 2022.

Streeter says: ‘Bargain hunters may have taken advantage of the share price falls. Glencore has diversification in its huge portfolio and has a keen eye trained on the energy transition with its investments in copper and nickel, which is likely to have piqued investor interest.’

Shopping for bargains

Bargain hunting has, aside from income, been the name of the game this year. A number of big names have suffered as market conditions worsened and the economic climate became increasingly uncertain.

Aside from Glencore, Vodafone has been a top pick among investors despite a turbulent year which saw its share price fall nearly 20 per cent this year.

Wild says: ‘Appointing an insider as interim CEO didn’t go down well, and Margherita Della Valle has failed to revive firm’s fortunes.

‘Investors have bet that the telecom giant’s performance will improve at some point, but picking an entry point for Vodafone has been fraught with danger for some years and 2023 proved no different.’

Investors will therefore be hoping for a reversal of fortunes but 2024 might prove another testy year.

‘It’s offloading struggling divisions, such as its Spanish operations, and all options are still on the table for the Italian business,’ says Streeter. ‘Annual prices hikes have helped offset fragile customer numbers, so a potential move by Ofcom to stop inflation-linked price increases would be a blow.’

Have technology stocks remained popular?

The so-called ‘Magnificent Seven’ have been the standout stocks of the year, helping push the S&P 500 to soar 22 per cent year-to-date, and UK investors wanted a slice of the pie. 

Tesla has remained a near-permanent fixture in portfolios, despite a blip at the start of the year, and featured in the top 10 most bought stocks again 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 early in 2023 when the share price made a two-year low.

‘Tech was the place to be, and Tesla remains the EV company to beat heading into 2024. Rather than panic, Tesla devotees have used any pullback to pick up more stock. It’s a strategy that’s delivered handsome rewards, and there are no signs that Tesla’s popularity is waning.’

Streeter adds: ‘Past exuberance surrounding Tesla has already been ebbing due to concerns about profitability given the price cuts brought in to try and entice consumers amid a high interest rate environment. But Tesla’s prowess in coming up with novel and industry-shaping products simply can’t be ignored.’

Freetrade’s customers primarily bought into tech, with Tesla, Nvidia, Amazon, Alphabet and Apple the most backed stocks.

Nvidia had a barnstorming year after it achieved a $1trillion (£800million) valuation in June, putting it close to the value of Amazon.

The buzz surrounding the viral chatbot ChatGPT helped to push generative AI into the mainstream. Nvidia struggled in 2022 after slowing demand for its gaming chips and its failed bid for chip designer Arm from Softbank.

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

Shares are up 236 per cent year-to-date.

Bonds

Beyond equities, a lot of investors moved into bonds, where prices fell and yields soared to 15-year highs on interest rate expectations.

AJ Bell report two short-dated Treasury gilts – HM Treasury Gilt 0.25 per cent (31/01/25) and Treasury Gilt 0.125 per cent (31/01/24) – were the two most-bought in their shares and bonds.

The top fund was Royal London short-term money market.

Laith Khalaf, AJ Bell’s head of investment analysis said: ‘The fact the most purchased government bonds are short-dated suggests investors are using these as cash-like instruments, and this is reinforced by the fact that money market funds have proved similarly popular.

‘After many years of near-zero interest rates, it’s perhaps no surprise to find some investors filling their boots given the yields on offer look far more appetising.’

Some investors have also opted for bonds to protect their cash from the taxman. High interest rates on fixed savings accounts mean many are finding themselves caught in a tax trap on the interest they make.

‘While some may be using gilts as tax-efficient alternative to savings accounts, they are more risky and complicated, so are better suited to more experienced investors,’ says Khalaf.