Rear (QD)view mirror – 2022

221228 qd rear view

This time last year we highlighted climbing inflation and interest rates as issues overhanging markets. However, those headwinds were much stronger than we had anticipated thanks to Russia’s invasion of Ukraine. Given that backdrop, it was perhaps inevitable that markets would struggle in 2022. There were a few bright spots – Latin America and the Gulf region did relatively well, for example. So too, surprisingly perhaps, did the UK. However, a cursory glance under the hood reveals that the UK market’s strong performance was driven by a couple of handfuls of large stocks. The overwhelming majority of UK companies lost money for investors.

Our opinion pieces chart the course of the year. We opened with a look on the impact of inflation on the retail property sector, concluding that investors in retail parks might fare better than those with exposure to the high street. However, back then, while we were anticipating a hit to consumer spending, we were not thinking about outright recession. Shares in the companies mentioned continued to fall over the year, but – as we shall see – they were far from the worst hit property companies.

In January, we had an in-depth look at Ecofin Global Utilities and Infrastructure, concluding that the shares looked attractive. The trust then had a great run, peaking at 252p in September (up from 204p on the date of publication). However, rising interest rates have knocked the shares since.

We also had a look at the prospects for Polar Capital Global Financials Trust and suggested that we could see a return to a more normal, pre-global financial crisis economy. Rising interest rates are great for banks’ profitability. However, as we moved through the year, investors started to fret about the impact of recession on bad debts. The trust’s managers think that these fears are overdone.

In February, Matthew Read took a detailed look at CQS New City High Yield. Its share price has slipped a little over the year, but a yield of 8.6% continues to attract investors, allowing it to trade at a significant premium and continue to grow. 2022 might be the year that investors rediscovered bond funds. Capital performance has been hit by rising yields, but – thanks to the rate rises – the returns on offer are now much more attractive.

Then the invasion happened. Our QD view – can we really continue to turn the other cheek? – was published shortly afterwards and called for harsh measures, suggesting that western investors should avoid Russia until Putin goes. It took longer than we would have liked for governments to respond, but the sanctions that they implemented, and Russia’s response, meant that Russian investments were left pretty much valueless. JPMorgan Russian was the obvious casualty of this, but the move also did serious damage to the likes of Fidelity Emerging as well. Matt followed up on this with a look at the impact of the invasion on commodities markets.

In March, Richard Williams looked at Secure Income REIT as a property company whose index-linked rental growth made it attractive in an inflationary environment. However, in May it was absorbed by LXI REIT. Later, in June, he suggested that PRS REIT might be a good bet, and then in September he looked at the attractions of investing in supermarkets.

I wrote about AVI Japan Opportunity in March. A weak yen has held back returns from Japanese-focused companies over the year, but this trust has done relatively well by extracting value from cash/asset rich Japanese companies trading at sizeable discounts to their intrinsic value.

By April, with volatility high and negativity weighing on sentiment, I felt compelled to take stock. Amongst other things, I highlighted China’s struggles with its zero-COVID policy. While this has been lifted recently, I worry that the story might switch back to one of lockdowns as the death toll rises – something to watch for 2023. In June, I followed this up by contrasting China and Vietnam. The latter country’s willingness to use western MRNA vaccines saved it from the worst of COVID and is a factor in Vietnam being a favoured destination for manufacturers looking to diversify their supply chains.

This QD view also included a breakdown of performance by investment style. Surprisingly perhaps not much has changed since then – value continues to outperform growth, large cap is stronger than small and mid cap, momentum and quality are not much prized. In the first of her articles for QuotedData, Cherry Reynard picked up on the lack of enthusiasm for quality-focused investment approaches, which seems perverse given the uncertainties facing the global economy. Later, in August, she followed that up with a look at small cap trusts.

In May, in the wake of a profit warning from Amazon, Richard wrote about the logistics property companies – the collapse in their share prices has been the big property story of 2022. He followed this up in August, and again in October, by which time he was starting to wonder if the sector now offered value.

Matt reiterated our enthusiasm for India in a piece written in May. Cherry followed up on this with a QD view in November. The country appears to be booming, driven by its domestic economy and an uptick in manufacturing investment in particular.

Cherry discussed the private equity sector in June. We feel that this part of the market is oversold – with discounts at extreme levels – Alan Gauld, manager of abrdn Private Equity Opportunities (APEO) agreed. Recently, it was interesting to see that AVI Global Trust has been accumulating stakes in a number of these unloved stocks, including APEO.

Cherry’s next piece was on the recovery in the biotech sector, which sold off ahead of the general antipathy to growth stocks, but now, with takeover activity picking up, is showing signs of life, once again. In October, Robin Davison updated us on developments within the sector.

In July, I looked at Gore Street Energy Storage and followed that up with a story on Harmony Energy Income in October. Significant investment is needed in this area, which helps underpin its attractions. We have seen a number of renewable energy funds increasing their exposure to this area over 2022, and expect more of that to continue in 2023, provided the finance is available.

In October, a period of extreme political turbulence in the UK culminated in the disastrous ‘mini’ budget. Matt wrote about the success of absolute return funds in this environment.

Earlier this month, we asked Cherry to take a look at funds investing in Europe. Managers are focused on stock picking as they navigate the regions many problems.

More recently, we struck a more optimistic note. Finally, there are concrete signs that the rate of inflation is moderating. Investors are still nervous, and perhaps with good reason, but by the end of 2023, hopefully the picture will be brighter.

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