What worked in 2022: top shares and sectors in a challenging year

Stock screen expert Ben Hobson runs through the winning trades of the past 12 months and shares three investment lessons learned in 2022.

Take a look at some of the market forecasts being made at the turn of 2022 and you’d be forgiven for thinking there wasn’t much to worry about this year.

Back then the world was striding its way out of the Covid pandemic. Sure, there were fleeting concerns about virus flare-ups, but still an overwhelming sense that people and economies were getting back on their feet.

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Rising inflation had been burning away as a concern for several months, but nobody seemed too worried. Many took the view (central banks included) that inflation was transitory, a post-Covid hangover that would clear as bottlenecks in global supply chains started to ease.

Stock markets reflected that relaxed view. Britain’s large and mid-cap indices both saw their valuations rise by around 10% in 2021. Even the growth-focused AIM market, which had soared the previous year, held firm.

But then things changed. Russia’s invasion of Ukraine at the end of February has been foremost a humanitarian tragedy. But it sparked major geopolitical shifts that were almost unthinkable just months earlier - including a massive change in energy policy across Europe.

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The war also proved a catalyst for inflation, which together with rising interest rates that were employed to fight it, became the dominant theme in markets in 2022.

With a realisation that economic pressures were getting much more serious, shares sold off heavily almost everywhere.

Markets go risk-off

Textbooks will tell you that investors tend to get defensive when clouds gather on the economic horizon. That’s what we saw in 2022. Many of the common moves you’d expect to see when markets go risk-off came to pass.

Chief among them was that larger-cap shares performed better than mid and small-caps. The FTSE 100 soaked up a lot of pressure through the year and is on course to finish in positive territory. The mid and small-cap indices fell much harder.

But it wasn’t just company size that governed where investors looked for safe havens. There were also distinct trends in the performance of different industry sectors.

As you can see from this snapshot of performance, energy was the big winner this year. Imbalances in global energy supplies triggered a sharp rise in commodity prices that boosted profits in the oil and gas sector.

But all the classic defensive sectors in the FTSE 350 did reasonably well, including healthcare, defence and consumer durables.

Source: SharePad, FTSE 350 sector performance 12 months to 19/12/2022

By contrast, the worst-performing sectors were dominated by those sensitive to consumer spending. Everything from auto sales to jewellery, house construction and retail came under severe pressure.

Source: SharePad, FTSE 350 sector performance 12 months to 19/12/2022.

While the market was in defensive mode through much of the year, there were still some big share price winners. Here is where they you could find them:

FTSE 100: defensive resilience in a crisis

One of the inevitable outcomes of war on the edge of Europe this year is that aerospace and defence contractors around the world are benefiting. BAE Systems (LSE:BA.) is one of them. Increasing order flow in 2022 is a hint that defence budgets are likely to grow in the years ahead. BAE is also one of many FTSE 100 firms that reports its finances in US dollars. With the dollar so strong against the pound this year, that has been a big tailwind to earnings.

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Meanwhile, Pearson (LSE:PSON), the education business that has frustrated the market in recent years, turned its fortunes around in 2022, making it one of the best-performing shares. 

Others in the top list reflect the economic conditions. Glencore (LSE:GLEN) has been a winner on the back of its exposure to multiple commodity markets, as has Shell (LSE:SHEL), while banking giant Standard Chartered (LSE:STAN) looks set to see profits grow on the back of rising interest rates.  

Note the yields on these blue-chip shares are handsomely covered by expected earnings. FTSE dividends have held firm this year and proved to be an attractive source of returns. That could well continue into 2023.

Source: Stockopedia. Excludes Homeserve (takeover)

Mid-caps: domestic exposure spooks investors

Mid-caps in the £250 million to £3 billion range can be found in the FTSE 250, FTSE SmallCap and AIM 100 indices in London. This part of the market tends to have more domestic exposure than the large-caps, and that’s been reflected in a sharp sell-off this year.

Despite this, there have been some notable mid-cap winners this year - and it’s worth mentioning that dividend yields here have shot up in places during 2022.

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As we close in on the end of the year, the best-performing share in this range is ME Group International (LSE:MEGP) - the company that used to be known as Photo-Me. ME makes self-serve vending and service machines, covering food, photos and laundry. With the shares up by over 100% relative to the FTSE All-Share, it’s one of the best performers anywhere.

ME is not the only technology stock to have done well, either. Nanoco Group (LSE:NANO) and Hostelworld Group (LSE:HSW) are both speculative, unprofitable shares with big stories behind them. Their strong performance this year suggests the market still has an appetite for potential fast growth, despite inflationary and recessionary fears.

Much more in tune with the mood music was the strong performance of energy-related stocks like Hunting (LSE:HTG), the oilfield services company, and i3 Energy (LSE:I3E), an oil and gas producer.

Source: Stockopedia. Excludes RPS (takeover).

Small-caps: speculative growth is out of favour

Like many small-cap indices around the world this year, the AIM market saw substantial price falls. In part this reflected the more speculative nature of many of the hundreds of shares quoted on the market. Pre-profit companies are a much riskier prospect in an era of rising inflation and potential recession.

But there were some strong gains. Oil and gas and mining, which are well-populated sectors on AIM delivered some of the strongest. It’s worth remembering that the small size of many firms means a surge of interest can create exceptional movements in prices, but they can reverse just as quickly.

None of the top five biggest share gainers pays a dividend, so there was no yield on offer. But in terms of relative performances, the 333% upward move by payment process technology share Tintra (LSE:TNT) was eye-catching. Note that recent downward pressure on the price shows how volatile these shares can be. The same goes for price moves at Premier African Minerals (LSE:PREM).

Impressive gains at Prospex Energy (LSE:PXEN) and Angus Energy (LSE:ANGS) were a nod to the strong demand for firms allied to the UK energy sector. Meanwhile, Wandisco (LSE:WAND), a distributed computing specialist, saw its price soar in the latter part of the year on new contract agreements that should boost earnings at the firm.

Source: Stockopedia. Excludes Crestchic (takeover)

2022: highlights in an uncertain year

If there was ever a reminder of just how quickly the market mood can change, 2022 was it.

After a bright start, a largely unexpected war compounded post-Covid weaknesses and sent parts of the market into a tailspin. On reflection, the market has behaved as you might expect: many small, speculative growth shares have fallen out of favour. In their place, larger, profitable and defensive shares have performed much better.

Of the lessons, diversification between industry sectors and geographies (currency) would certainly be one. Another would be that a return to a more normal monetary environment (higher rates) makes good quality companies, with strong finances and defendable business models much more desirable.

A third lesson is that there are always winners in a downturn. This year has felt like a challenge but some shares have performed admirably. From here, once the market senses an improving outlook, it is reasonable to think that many more shares will see an upward trend.

Ben Hobson is a freelance contributor and not a direct employee of interactive investor.