James Harries, equity fund manager at Troy, says many of the defensive stocks that underperformed for large segments of this year did so because the market views those types of shares as “behaving like bonds”, but he feels this misreads the investment case.

Harries says: “In reality, because those types of equities can grow dividends, they behave more like inflation-linked bonds, and so can offer protection. The key is that many of those companies sell products that are staple items and so they can increase prices in line with inflation and not lose sales.”

Pound shopping?

One feature of the UK equity market this year has been the boost to dividends from sterling weakness. 

James Goldstone, UK equity investor at Invesco, says that while he would never invest purely on the basis of his view on currencies, he says investors should note that most of the earnings of FTSE 100 companies are generated overseas, and so weak sterling is likely to boost the value of those dividends. 

Murphy says that sterling weakness has helped returns over the past year, but says another benefit, apart from the boost to dividends, is that sterling weakness could lead to more takeovers of UK-listed companies by overseas buyers, and boost the potential capital gains for investors. 

Although it may seem counterintuitive, Simon Gergel, who runs the Merchants investment trust, says that while the defensive parts of the market, many of those being stocks that benefit from sterling weakness, are “not expensive”, they are “not as cheap as the cyclical stocks".

"I think a lot of bad news is already in the price of the cyclical stocks, many of which will still be able to pay dividends." 

Brady says that among the equity income funds to which he allocates on behalf of WH Ireland clients are JO Hambro UK Equity Income and Unicorn Income. 

2023 is likely to be another year of dramatic moves in yields, and present fresh challenges for investors. 

David Thorpe is special projects editor of FTAdviser