In a year of three prime ministers, war in Europe, recession, rising mortgage costs, double-digit inflation, enormous energy bills, strikes, higher taxes, a dramatic plunge in the pound in October and a debacle with pension funds that the Bank of England said threatened to create “a material risk to financial stability”, you may not necessarily have bet on the FTSE 100 index to end 2022 higher than it started.
There are still a few trading days to go, 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 quickly at that rate but you should sleep at night. Over in the US, the broadly based S&P 500 index has slumped by a fifth this year.
A few explanations and disclaimers are required, naturally. First, a weak pound – down 11% versus the dollar, even after a rally once Liz Truss and Kwasi Kwarteng had been bundled off stage – tends to be helpful for an index overpopulated with oil companies, miners and pharmaceutical firms that make the greater part of their revenues in dollars but have sterling share prices. Expressed in dollar terms, the Footsie’s performance wouldn’t look as pretty.
Second, after several lacklustre years, one could sniffily say the FTSE 100’s outperformance is a case of every dog having his day. Or, since London was labelled as “the Jurassic Park of stock exchanges” by the hedge fund manager Sir Paul Marshall, perhaps every dinosaur. The UK has too many fund managers clipping dividend coupons rather than investing in growth and innovation, Marshall argued. He may be right, but dividends came back in fashion in 2022 as the US tech brigade was clobbered in a climate of rising interest rates. Ocado (down 60%) is virtually the Footsie’s only tech champion, aside from the investment trust Scottish Mortgage (off 45%).
Third, Russia’s invasion of Ukraine clearly changed everything. Defensive assets (and the Footsie’s top performer this year is a defence company, BAE Systems) are usually safe places for investors to hide in times of geopolitical uncertainty. Soaring energy prices obviously propelled the index heavyweights BP and Shell higher (both up 47%).
Fourth, the relative buoyancy says nothing positive about the investment world’s view of the UK. A stock market index is merely the sum of its constituents, and the collection of the 100 largest companies by capitalisation on the London market is international and eclectic. It runs from a Chilean copper miner (Antofagasta) to a hedge fund run by a US billionaire (Pershing Square).
If you’re looking for pure domestic companies, you’ll find a group towards the lower end of the performance table. The bottom five include the housebuilders Persimmon and Barratt Developments, which are operating in a weakening market where prices probably have further to fall in 2023, plus Segro, an owner of UK warehouses. The sense of distrust around the UK “as an investment thesis”, as the Lloyds Banking Group chief executive, Charlie Nunn, put it recently, still lingers after the mini-budget and the year’s political pantomime.
One can, then, regard the modest spring in the Footsie’s step in 2022 as nothing more than a statistical oddity driven in large part by horribly high energy prices and a panicky preference for the so-called “value” stocks in which the London market is unfashionably overweight. It would be a reasonable view.
But another is possible. When investment trends turn, they can stay turned for a while. The triumphant era for exciting “growth” stocks lasted from the end of banking crisis in 2009 until 2021, which was an exceptionally long cycle. It is surely plausible that a shift back towards “value” and dividends could be more than a passing fad. Don’t expect them to sprint, but the FTSE 100’s dinosaurs don’t look extinct yet.