The global equity universe underwent a revolution in 2022, with the tech stocks that had previously dominated the performance tables being displaced by more value-driven companies.
It is testament to the shake-up that happened in 2022 that the two best-performing markets in the world were the FTSE 100 and Latin American equities, both of which had generally been in the doldrums.
But if market movements in 2022 were clearly in one direction as investors sought to protect their portfolios from rapidly rising inflation, the new year brought only less certainty, with growth, value and defensive equities each enjoying a period of favour with investors.
This was due to the challenge of responding to first, expectations of a recession, then the realisation that economies were proving more resilient than expected, and finally the potential for inflation to remain higher for longer.
James Thomson, who runs the Global Opportunities fund at Rathbones, says the uncertainty is causing many investors “to stay on the sidelines right now”.
He adds that, with two-thirds of economists expecting a recession, “the element of surprise around a downturn has gone but there has been the pleasant surprise in how resilient economies and markets have proven to be during the recent banking crisis in the US.”
Thomson says the companies that will thrive in the market conditions likely to prevail over the coming year will be businesses that “have pricing power, and provide mission critical services to their customers.
"It is important to own the strongest companies in the different sectors; one of the reasons for the market movements of last year is there were a lot of companies that were not resilient if the world changed, and when the world did change, companies such as Shopify found they were built for a world that no longer exists.”
Short-term indicators
But the major thing Thomson says he believes investors get wrong is to focus too much on valuations as a short-term indicator of the potential for a stock price, as he says there is no correlation between the valuation at which a company trades today and the prospects on a 12-month view.
Simon Webber, global equity portfolio manager at Schroders, agrees that investor fixation with growth or value stocks is likely to be otiose in the coming year, both because neither of those investment factors look either particularly cheap or expensive right now.
“And the outlook for the market likely means that the rotations between those styles will likely be sharper and more frequent than they were in the decade between the end of the financial crisis and the start of the pandemic when growth stocks enjoyed a long period of outperformance, and then in 2022 when value stocks did well.”
Thomson says one of the areas of the market that has already held up well and that he expects will prove resilient in the event of a recession is luxury goods.
