Investors have had to adapt to varying market conditions so far in 2022 and perhaps no more so than in the UK, where high inflation has taken hold.
After years of low price rises, Covid and the war in Ukraine have bumped up energy, food and fuel prices, which in the UK are rising at a 40-year record.
In May, inflation was 9% year-on-year and the Bank of England has warned it might reach 10% in the coming months. To tackle the cost-of-living crisis, the Bank Rate was increased to 1%, the highest since 2009, with more rate hikes expected.
This has shaken up financial markets, as investors are taking a long, hard look at their portfolios and re-thinking their strategies in this rate-rising environment.
It has led to a preference for value stocks and a shying away from growth companies – something that has taken its toll on many of the winners of the previous decade.
Rob Burgeman, senior investment manager at Brewin Dolphin, said “the speed and depth of some falls has been extraordinary”. Indeed, tech, healthcare and consumer staple stocks that led the league tables following the financial crash, have plummeted in 2022, as the below charts show.
FTSE 100’s bottom 10 performers, 2022 year to date
Source: Brewin Dolphin
FTSE 250’s bottom 10 performers, 2022 year to date
Source: Brewin Dolphin
While some of these stocks face new, unprecedented challenges, not all have the same future prospects, according to Burgeman. Below he outlines six companies: two that could come good, two that have the potential to be bad, and two that are downright “ugly”.
Scottish Mortgage
First up is Scottish Mortgage, the investment trust that has tumbled 40.4% so far in 2022 as it has suffered from the double whammy of poor performance from its underlying companies (Tesla, for example, fell 47.6% between January and May 2022) and investors selling its shares.
Performance has been so bad that the trust lost its title of UK’s largest investment trust in May 2022, when it was down 49.4% from its £20bn peak of November 2021.
However, Lawrence Burns deputy manager of the fund, said that periods such as this have historically led to “spectacular gains”, recalling stock-specific examples including Amazon, Illumina and Tencent.
Many analysts, including Burgeman, have given the trust the green light on the basis of a good long-term track record. Indeed, over the past decade it has made 590.9%, the best performance in the IT Global sector and more than double the FTSE All World index.
Total return of trust vs sector and benchmark over 10yrs
Source: FE Analytics
“Arguably, the trust is on the wrong side of current trends”, said Burgeman, who noted that there may be further falls to come and that timing the right day to buy and sell will be difficult.
Nevertheless, Numis analysts confirm that buying a good manager or approach “at a time when it is out of favour is normally a profitable approach in the investment companies sector”, while Tracy Zhao, senior fund analyst at interactive investor, highlighted the 8.7% discount to Net Asset Value (NAV), as an attractive entry point.
Liontrust
Liontrust also received Burgeman’s seal of approval, as it remains “a well-resourced investment management house”. This is despite the company making a 51.4% loss so far in 2022.
An investment house earns fees from managing funds, which makes the sector a “big loser” when markets are falling.
However, the company has been adversely affected by investors giving its ESG values the cold shoulder, as they reallocate their funds to more traditional value stocks such as energy and mining companies.
Yet Burgeman said now might be the right entry point into a company “with an excellent range of funds and a strong entrepreneurial culture”.
Royal Mail
Turning to the “bad” side, Royal Mail does not convince Burgeman, who fears structural challenges in the postal market and increased fuel and labour costs might leave the company languishing.
The innovation spurt it underwent during the pandemic, having shifted operation from letters to parcels and implemented an automatised parcel-sorting structure to replace the previous system of handling them by hand, is unlikely to contain the damages, he argued.
“As things normalise and we see online sales fall, the company is left with big increases in costs – from fuel and labour, for example – and a structurally challenged postal market. This puts Royal Mail in a precarious position,” he said.
Moonpig
The Brewin Dolphin investment manager also expressed mixed feelings around greeting cards retailer Moonpig, despite its proposed acquisition of the entire issued share capital of Smartbox Group, the owner of brands such as BuyAGift.
Chief executive Nickyl Raithatha said the acquisition is an effort to become “the ultimate gifting companion” but Burgeman said the company is suffering from the same issues as Royal Mail: a flurry of pandemic activity may prove to be a fad.
Moonpig was a pandemic success story with significant growth driven by online demand for its services, but he questioned whether a pre-printed card would leave consumers “warm and fluffy” in a post-Covid world.
Coca-Cola Hellenic Bottling Company (HBC)
Last up, on the “ugly side”, Coca-Cola Hellenic Bottling Company is a company that does what is says on the tin: bottles Coca-Cola.
This should be a sound business, Burgeman said, but there are real concerns about its large exposure to Russia I the wake of the country’s invasion of Ukraine.
The company has struggled in the first quarter of 2022 but has promised to minimise its exposure to Russia yet Burgeman is unconvinced.
“The situation in Ukraine and the sanctions from the West that have followed are likely to act as a substantial drag on earnings for the foreseeable future,” he said.
Genus
Another one to avoid, according to Burgeman, is biotechnology company and livestock semen provider Genus, which has been one of the worst performers in the FTSE 250, with shares down 62.2% between September 2021 and early May 2022.
The firm has been affected by falling pig prices in China and the recent instability in the country and the company predicts further insecurity in the porcine market into the second half of 2022.
“With economic conditions in the world’s second largest economy still uncertain, these headwinds are likely to last for some months,” said Burgeman.