In a year of three prime ministers, war in Europe, recession, rising mortgage rates, double-digit inflation, huge energy bills, strikes, higher taxes, a dramatic fall in the pound in October and a pension fund disaster the Bank of England said , that it threatens to pose a “material risk to financial stability”, you wouldn’t necessarily have bet on the FTSE 100 ending 2022 higher than it started.
There are still a few trading days left, so an up year is not guaranteed. But at 7,469, the index was in positive territory for 2022 by a margin of 1.1% at Thursday’s close. Include dividends paid by the 100 constituents, and the total return is closer to 5%. You won’t get rich quick at this rate, but you need to sleep at night. In the US, the broad-based S&P 500 has fallen by a fifth this year.
Naturally, a few explanations and disclaimers are in order. First, a weak pound – down 11% against the dollar, even after a rally after Liz Truss and Kwasi Kwarteng were bundled off the stage – tends to be good for an index crowded with oil companies, miners and pharmaceutical firms making more most of their earnings in dollars but have share prices in pounds. In dollar terms, Footsie’s performance wouldn’t look so pretty.
Second, after a few lackluster years, it could be said that the FTSE 100’s outperformance is a case of every dog having its day. Or, as London was labeled the “Jurassic Park of the stock markets” by hedge fund manager Sir Paul Marshall, perhaps any dinosaur. The UK has too many fund managers clipping dividends instead of investing in growth and innovation, Marshall argued. He may be right, but dividends came back into vogue in 2022, when the US tech brigade was immersed in a climate of rising interest rates. Ocado (down 60%) is virtually the only Footsie tech champion apart from investment trust Scottish Mortgage (down 45%).
Third, Russia’s invasion of Ukraine apparently changed everything. Defense assets (and this year’s top Footsie performer is defense company BAE Systems) are generally safe places for investors to hide in times of geopolitical uncertainty. Rising energy prices clearly pushed index heavyweights BP and Shell higher (both up 47%).
Fourth, relative buoyancy does not say anything positive about the investment world’s view of the UK. A stock market index is simply the sum of its constituent parts, and the collection of the 100 largest companies by London market capitalization is international and eclectic. He goes from a Chilean copper miner (Antofagasta) to a hedge fund run by an American billionaire (Pershing Square).
If you are looking for purely local companies, you will find a group towards the lower end of the performance table. The bottom five include builders Persimmon and Barratt Developments, which operate in a weakening market where prices are likely to fall as early as 2023, plus UK warehouse owner Segro. The sense of distrust surrounding the UK “as an investment case”, as Lloyds Banking Group chief executive Charlie Nunn recently put it, still lingers after the year’s minibudget and political pantomime.
The modest spring in the Footsie’s step in 2022, then, can be seen as nothing more than a statistical quirk, driven largely by horrendously high energy prices and a panicked preference for so-called “value” stocks, in which the London market is unfashionably overextended. weight. It would be a reasonable opinion.
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But something else is possible. When investment trends reverse, they can stay reversed for a while. The triumphant era of exciting “growth” stocks lasted from the end of the banking crisis in 2009 until 2021, which was an extremely long cycle. It’s certainly plausible that the shift back to “value” and dividends could be more than a passing fad. Don’t expect them to sprint, but the FTSE 100 dinosaurs don’t appear to be gone just yet.
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