If I invest £1,000 in Rolls-Royce shares now, what could my return be this year?

One of the most popular denials in finance is “Past performance does not guarantee future returns”. This is true and investors should not blindly invest in a stock just because it has gone up in the past.

However, there is also the benefit of looking at past events and their impact on stock prices to try and predict the future. Given the movement in Rolls-Royce (LSE:RR) shares in recent years, what can this year offer?

Look at the past

Over the past year, the stock has fallen 20%. Over the past five years, this figure was 69%. So when I take the five-year average return, it’s a negative 13.8%.

On the face of it, this does not fill me with confidence that I should put £1,000 of hard-earned money on it. If the return for the next year is the same, I will not be happy. But I also need to know what is causing this performance drop.

Most of the share price’s five-year decline came with the stock market crash in early 2020. Then, as the pandemic really began to take hold, Rolls-Royce shares halved their value in a matter of weeks.

The main driver behind this is the impact on the Civil Aerospace division. The need for new engine suppliers and servicing of existing ones for major airlines is almost overnight. With almost zero air travel, revenue for the largest part of the group is lost.

By the beginning of 2023, the business has started to move away from its heavy reliance on this division. It has undergone restructuring and has slimmed down some operations to reduce debt. So, although past stock price performance reflected the pandemic, it is now in the rearview mirror.

A catalyst for the future

My return for this year could be positive, as the current share price should reflect all the general bad news from the past. If 2023 proves to be a better year, then the optimism should logically pull stocks higher.

One positive catalyst may be the easing of restrictions in and out of China. Given the size and income these consumers have, I expect to see an increase in air travel. In turn, this should be of indirect benefit to Rolls-Royce.

Another factor will be the outperformance in the Defense division. In December, the stock price jumped with the confirmation of a US defense agreement with Textron, requiring thousands of engines from Rolls-Royce. Given the current focus on security, more global government spending on this would be good for business.

Potential returns

On balance, I think stocks can offers me a positive return this year if I invest now. It is based on a catalyst that can cause a rally. However, I am well aware of the poor performance of the past few years. This may prevent investors from being confident enough to invest now. Therefore, I will save my money because I can find stocks with a better risk/reward ratio to invest in in 2023.