Looking back on a year of multiple crises.

The basic rule of a crisis is that you don’t come out of it the same. If you get through it, you come out better or worse, but not the same.” This observation by Pope Francis has interesting implications for all of us but particularly for UK equity investors as 2022 has been the year of crises.

European war, energy-price spikes, inflation, rising interest rates, sterling weakness, looming recession and political disarray, as well as the longer-duration issue of climate change, have featured throughout 2022. Crises bring about change, and in 2022 the domino effects of these crises have been far-reaching. They have not only affected investment strategies and returns but have also challenged the investment philosophies themselves: active versus passive, conventional versus sustainable, growth versus value.

The most notable event in 2022 was unquestionably Russia’s invasion of Ukraine. The disruption of energy and food supplies, and the implications for energy prices and for defense spending created a negative impact wave leading to higher inflation, higher interest rates, lower economic growth and, consequently, lower equity prices. Sustainability was put on the back foot, with a general backing off of hawkishness on carbon emissions in favor of energy security, and a more positive assessment of the moral dilemmas around investing in defense.

In a potentially linked outcome, COP27 made no real progress on reducing carbon emissions. The war in Ukraine also put pressure on governments as they sought to mitigate the impact on their constituents. The UK did not fare well in this regard. 2022 has been the year of three prime ministers. Governance issues eliminated the first, economic incompetence the second, while the third, post the brief panic on bond yields and mortgage rates, has returned to defensive fiscal orthodoxy.

From a UK equity perspective, the investment impact of all this change has been substantial. Stocks negatively sensitive to higher interest rates, notably growth stocks, underperformed. The weak performance of the domestic economy alongside weak sterling hit the FTSE 250, while the FTSE 100 offered more resilience given its global tilt and its exposure to ‘invasion winners’ such as oils and mining, as well as financials which benefited from higher rates. In terms of investment styles, value (often ‘old economy’ – defense, tobacco, oil) outperformed growth, while conventional outperformed sustainable for similar reasons. Passive generally outperformed active, even though one could have assumed passive funds, which are commonly algorithms of the past, may have struggled with the extent of disruption. However, UK active investment managers’ continued bias towards growth and mid-cap stocks has largely proved costly.

In conclusion, it is worth noting that, despite everything, the FTSE 100 has remained almost flat in 2022. This is perhaps because the starting point, post Brexit and the pandemic, was already depressed. As we look towards 2023, the low equity valuations reflected in the index continue to suggest a gloomy outlook. However, outcomes are difficult to predict as the key crises of Ukraine and the threat of recession can still play out in different ways.

Meanwhile, reassessment of portfolio styles is likely to continue as negative investment performance challenges established trends towards growth and sustainability investing. Crises do tend to generate change and, consequently, change the perceptions of investors, although as active managers will attest, judging that change is not always easy. The burden of potential for investors to capitalize on this change remains as they seek to deliver positive returns versus the passive competition. Most will be hoping that 2023 is a less interesting year.


THIS ARTICLE FIRST APPEARED IN FT ADVISER

Comments

Your email address will not be published.

Newton does not capture and store any personal information about an individual who accesses this blog, except where he or she volunteers such information, whether via email, an electronic form or other means. Where personal information is supplied, it will be used only in relation to this blog, and will not be collected or stored for any other purpose. Comments submitted via the blog are moderated, and, as a result, there may be a delay before they are posted.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. For additional Important Information, click on the link below.

Important information

Issued by Newton Investment Management North America LLC ("NIMNA" or the "Firm"). NIMNA is a registered investment adviser and subsidiary of The Bank of New York Mellon Corporation ("BNY Mellon"). The Firm was established in 2021, comprised of equity and multi-asset teams from an affiliate, Mellon Investments Corporation. The Firm is part of the group of affiliated companies that individually or collectively provide investment advisory services under the brand "Newton" or "Newton Investment Management" ("Newton"). Newton currently includes NIMNA and Newton Investment Management Ltd. ("Newton Limited").

Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. Statements are correct as of the date of the material only. You should consult your advisor to determine whether any particular investment strategy is appropriate.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including NIMNA and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management North America.

This material is for institutional investors only. This publication or any portion thereof may not be copied or distributed without prior written approval from the firm.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance.

Any forward-looking statements speak only as of the date they are made, and are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements.

Information about the indices shown here is provided to allow for comparison of the performance of the strategy to that of certain well-known and widely recognized indices. There is no representation that such index is an appropriate benchmark for such comparison.

In Canada, Newton Investment Management North America LLC is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia and Manitoba. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

Share