The macro-economic backdrop in 2022 was dominated by Russia waging war on Ukraine, rising inflation and interest rates, and challenges in supply chains and labour markets.
In the UK, we also had the farce of the short-lived Liz Truss leadership, increasing industrial action, and gloomier prospects for the domestic economy.
And yet there were some big risers on the London Stock Exchange, as well as many fallers. Let’s have a look at them – and at where value might be for investors in 2023.
First, how did the UK’s major indexes perform? Well, the big picture was one of contrast between blue-chip giants and their smaller kin:
- FTSE 100: +1%
- FTSE 250: -20%
- FTSE SmallCap: -16%
- FTSE AIM: -32%
The FTSE 100 kept its head above water with a higher level of international earnings than more domestically focused smaller companies. A good number of the biggest blue chips also sit in recession-resilient sectors.
The top FTSE 100 riser was defence firm BAE Systems (+61%). Inevitably, Western defence spending and demand for BAE’s products will increase as a result of Russia’s geopolitical game-changing invasion of Ukraine.
In the FTSE 250, QinetiQ (+34%) was another strong performer in the defence sector.
The conflict between Russia (one of the world’s largest oil and gas producers) and Ukraine (‘the breadbasket of Europe’) also sent energy and food prices soaring.
BP (+44%) and Shell (+43%) made strong gains on the back of higher oil and gas prices. Fellow Footsie giant Glencore (+47%) — a major producer and marketer of minerals, metals, energy and agricultural commodities — was another hot stock.
Meanwhile, international energy services group Hunting (+97%) was a notable riser among smaller firms.
There were mixed performances in the financial sector, but some good gains in areas. Specialist insurer Beazley (+46%), which manages six Lloyd’s of London syndicates, was the top FTSE 100 financial-sector performer.
Banks generally fared well, with rising interest rates a positive for their profits. Harking back to my mention of international earnings, Asia/Africa-focused Standard Chartered (+43%) was the Footsie’s top-performing bank.
In the FTSE 250, shares of Bank of Georgia (+56%) were in demand, as were those of Investec (+35%) which earns the lion’s share of its profits from southern Africa.
Not all the major moves in share prices were driven by sector themes. Educational publishing group Pearson (+53%) ranked second on the 2022 blue-chip risers board. Sentiment for this stock surged after it rebuffed a premium-price takeover offer and delivered a strong trading performance.
Meanwhile, emergency home repairs group Homeserve (+37%) is currently the subject of an agreed takeover.
Ocado (-63%) was the FTSE 100’s worst performer. Like many growth stocks in the low-inflation environment of recent years, it had become heroically priced on predicted high cash flows some years into the future.
In the face of 2022’s rampant inflation, the net present value of these ‘two-birds-in-the-bush’ future cash flows declined, and the market de-rated the shares severely.
Another FTSE 100 casualty of this phenomenon was growth-focused Scottish Mortgage Investment Trust (-46%) whose major holdings include the likes of Tesla.
Shareholders of the big FTSE 100 house-builders also suffered a miserable 2022. With the economy turning downwards, so did their share prices. Taylor Wimpey (-42%), Barratt Developments (-47%) and Persimmon (-57%) were among the index’s biggest fallers.
Commercial property was out of favour too. All four FTSE 100 Real Estate Investment Trusts (REITs) suffered double-digit declines. SEGRO (-47%) was the worst of them.
The slumping economy and cost-of-living crisis also hurt consumer cyclical stocks. These businesses are vulnerable when cash-strapped customers cut discretionary spending.
FTSE 100 retailers Next (-29%), B&Q owner Kingfisher (-30%) and JD Sports Fashion (-42%) all fell foul of negative sentiment.
There were even bigger falls among consumer cyclicals outside the FTSE 100. For example, Wizz Air (-55%), cruise ships group Carnival (-58%) and ASOS (-79%). And let’s not forget 100% wipe-outs like Joules and Made.Com — scratched from the scorecard since collapsing into administration before the year end.
At times like now, I think it’s worth remembering that recessions and high inflation don’t last forever. Also, that markets begin to re-rate stocks for recovery often well before the recovery emerges.
Market volatility could continue for some time yet. But I’m getting increasingly interested in some of the de-rated growth stocks, out-of-favour REITs, and battered consumer cyclicals. The ones that interest me most have strong underlying businesses and robust balance sheets.
On that note, let me wish you Happy New Year and successful investing in 2023!
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