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The Year in Review: Has the rebound been rebuffed?

A year that began with criticisms of coronavirus measures is ending in the same way
December 30, 2021

The editor’s note in our first issue of 2021 began by agreeing with an assertion by JD Wetherspoon (JDW) founder Tim Martin that restrictions introduced to halt the spread of the Alpha and Beta Covid-19 variants were lockdowns in all-but name.

A year on and the never knowingly under-opinionated Mr Martin has been speaking out again, describing the ‘Plan B’ measures introduced this month to fight the spread of the Omicron variant as a “lockdown by stealth”.

The measures certainly spoiled the festive period for the hospitality sector, with industry body Hospitality UK reporting that businesses had lost between 40 and 60 per cent of December trade as companies cancelled gatherings and people stayed away from pubs to avoid the prospect of spending another Christmas isolating from their families.

The government stepped in on 22 December to announce a further £1bn of support measures for the sector, which  Confederation of British Industry chief economist Rain Newton-Smith said provided “welcome breathing space” that would allow many outlets to keep their doors open throughout the winter.

Supermarkets cleaned up, though. With people spending more of the festive period at home, sales in the 12 weeks to 3 December were 2.5 per cent below last year’s lockdown-fuelled bonanza but 5-6 per cent ahead of 2019 levels.

And although the fight for market share has been as intense as ever, the big grocers remain attractive businesses, as this year’s battle for supermarket group Morrisons showed.

Following the TPG-backed £6.8bn buyout of Asda from Walmart by the Issa brothers last year, another US private equity firm, Clayton Dubilier & Rice, eventually won a £7bn fight for Bradford-based Morrisons, Britain’s fourth-biggest supermarket.

UK defence contractor Ultra Electronics (ULE) also became the subject of a private equity bid and our 13 August cover feature explained why British companies had become such frequent targets for those once known as the Masters of the Universe. It identified the factors – big property portfolios, cash generation and depressed share prices – that made them so attractive.

Another component was the disconnect in valuation between US and UK equities, particularly during the first few months of the year when booming markets on the other side of the Atlantic spurred a hike in activity.

 

Games without end

As US government stimulus cheques burned holes in the pockets of its citizens and apps such as Robinhood (US:HOOD) offered free trading in shares and options, a remarkable run-up began in both the price and traded volumes of shares in troubled companies such as GameStop (US:GME) and AMC Entertainment (US:AMC), which earned the moniker ‘meme stocks’ due to their popularity on social media platforms.

Members of r/WallStreetBets, a forum on online communities site Reddit (which has since announced its own plans to list) where users discuss their share trading, teamed up to buy shares of heavily-shorted companies, leading to a short squeeze on some hedge fund investors who had overborrowed shares to short and were then forced to buy at inflated prices to close out positions. GameStop’s share price began the year at just under $19 and was bid up to an all-time high of $483 on 28 January, before falling back below $55 on 4 February, in a week of highly volatile trading.

The ‘meme stocks’ episode also highlighted generational differences in attitudes towards investing, with younger people displaying more cynicism about the broader purpose of stock markets, and many viewing them as glorified casinos, r/WallStreetBets founder Jaime Rogozinski argued in a new book.

This trend also helps to explain why younger investors are more willing to gamble on the value of ‘assets’ such as cryptocurrencies with sketchy provenance.

 

A change is gonna come

Climate change was a topic that dominated in 2021, with new evidence of the harm caused by global warming and new efforts to turn back the tide through agreements, regulations and legislation, and pressure from activist groups, leading to environmental, social and governance (ESG) playing a bigger role that ever before in the global investment landscape.

Global sustainable fund assets rose to $3.9tn at the end of the third quarter of this year, according to Morningstar. The EU’s Sustainable Finance Disclosure Regulation, introduced in March, prompted a further surge in ESG interest on the continent. Net inflows to Europe-domiciled funds rose by $108.7bn to $3.4bn, Morningstar’s data found..

Even companies that aren’t actively marketing themselves to ESG investors can’t afford to ignore the issues that arise from it. In the midst of this year’s COP26 summit in Glasgow in November, the UK government said that companies with a turnover of more than £500m and at least 500 employees will have to declare the climate-related risks they face.

 

Breaking up is hard to do

Investor activism on climate matters is growing, as Shell (RDSB) has recently found, following a call by Third Point Investors for the company to split its operations into a business focused on renewables and a heritage business housing its (much more cash-generative) oil exploration and refining arm. This came just months after the company was ordered by a Dutch court to speed up its energy transition.

Commodities giant Glencore (GLEN) has also faced a campaign from activist Bluebell Capital Partners to divest its thermal coal assets, but chief executive Gary Nagle argued earlier this month that its plan to wind down coal mines over a 30-year period “is the responsible strategy for both our business and for the world”. A sale to an investor with fewer ESG concerns could lead to much more coal being extracted (and burned) to maximise profit, the argument goes.

The defence sector faces similar issues, with many companies in the industry already experiencing lower valuations after falling foul of asset managers’ negative ESG screens.

Yet Morgan Stanley analysts Kristine Liwag and Matthew Sharpe highlighted in a recent research note that excluding defence companies from ESG funds could have a destabilising effect on geopolitics by reducing the sector’s access to capital. “We see a burgeoning view that defence… has an ESG role to play in deterring conflict and contributing to global security,” they said.

Advocating defence companies as suitable ESG investments will be a tough sell, though, even if investors look for alternatives to more expensive technology stocks facing reratings. The Nasdaq Composite index traded at a price/earnings ratio of more than 50 times earnings in the December 2020 and March 2021 quarters but declined to 40 times by the end September and is currently trading below 30.

Measures taken to curb the influence of tech companies in China, which caused Ant Financial’s initial public offering to be shelved late last year, led to a bad year for Chinese equity markets, which experienced their worst ever performance against the broader MSCI Emerging Markets index. China-focused investment trusts also faced a reckoning, with Beijing’s regulatory crackdown offering what the investment team at Ruffer described as a “re-education”.

With US Treasury yields set to rise as the Federal Reserve has signalled at least three interest rate rises in 2022, the outlook for emerging markets does not look as enticing as it has in recent years. More broadly, after three years of strong gains, conviction in the prospects for global equities markets appears to be weakening. On 21 December, Credit Suisse’s investment committee moved its short-term recommendation for equities markets to neutral, warning of the “considerable” risk that many parts of the world could end the year as they began – in lockdown.