How Unilever provided safe haven amid 2022’s stock market storm

Few will be sad to see the back of 2022, a year of chaos and uncertainty as the war in Ukraine fuelled soaring inflation, the tech bubble burst, interest rates spiked and political incompetence rocked markets.

The FTSE 100 held up remarkably well, rising almost 1% over the year as London’s blue-chip globally focused constituents saw their earnings power boosted by a weak pound, and energy giants bagged bumper profits. However, the more domestic-focused FTSE 250 slumped 20%, giving a truer picture of the struggles faced by retail, grocery and fmcg stocks.

“The fact the UK has been a basket case [last] year has meant international investors have eschewed the UK,” according to Shore Capital’s Clive Black. “As a result, we have low ratings and we’re starting to see takeover activity.”

Devro registered the biggest gains of the year as Germany’s Saria took over the sausage casings maker in November, sending the stock price soaring.

Other risers were few and far between, with tobacco giants Imperial Brands and British American Tobacco two of the strongest performers thanks to strong global demand for cigarettes and vaping, steady cashflows and reliable dividends.

Unilever ended 2022 as a winner, significantly outperforming Nestlé, which lost about 15% of its value.

Jefferies analyst Martin Deboo says Nestlé, like other long-duration assets, came under pressure in the wake of a sharp rise in bond yields.

In contrast, Unilever “started the year at an historically huge valuation discount to Nestlé,” adds Deboo. “Since then there have been major catalysts in the form of Nelson Peltz’s appointment to the board, leading to investors thinking there will be more radical action on the portfolio, and CEO Alan Jope announced his impending retirement.”

Adds Black: “It’s not that Unilever has performed wonderfully – though it has managed inflation well – but it is a safe haven.”

Despite having significantly less geographic spread than Unilever, Premier Foods also performed well, falling just 5%. Adds Deboo: “That Premier has weathered a storm like this with almost no damage to its share price is a real tribute to the resilience that management have built into the business.”

However, most UK-focused food and drink manufacturers got slammed as they battled to pass on surging costs, leading to profit warnings aplenty.

Deboo says UK food producers all suffered from the same malaise.

“There has been the double whammy of rampant commodity inflation driving up food prices, just as the consumer has seen their wallet being squeezed by rising mortgage rates and higher energy prices.”

Lossmaking McBride, which supplies own-label cleaning products to supermarkets, suffered badly (see table, right), highlighting the difficulty for suppliers in passing on inflation price rises to reluctant retailers.

Charles Hall of Peel Hunt notes it is difficult to negotiate real-time price increases when they are so significant.

He says even good companies were caught out in 2022 by the severity of inflation. “You may have thought you were perfectly positioned to manage it, but the reality was it is harder than you thought it would be.”

Other manufacturers plagued by profit warnings included Fever-Tree, ingredients supplier Treatt and meat packer Hilton Foods, which all saw share prices fall by over 50%. Cranswick fared better than Hilton – falling just under 20% – as it was easier to pass on rising costs in the pig industry than in seafood.

Food-to-go groups Greencore and Bakkavor both struggled with softening volumes as the sector’s recovery from Covid was hit by falling consumer confidence. Greencore (down more than 50%) fared worse than Bakkavor (down about 25%), as it was without a permanent CEO for most of the year, waiting for ex-Morrisons CEO Dalton Philips to take charge.

Charles Hall of Peel Hunt notes the impact of rising borrowing costs on supplier balance sheets as interest rates shot up after political upheaval in the summer.

Retailers

It was hardly better for retailers as the cost of living crisis dominated the year.

C-store chain McColl’s collapsed into administration in May, while Hotel Chocolat beat an embarrassing retreat from international markets (though it’s started the new year by signing a partnership with Eat Creator to open stores in Japan).

The remaining two listed supermarkets performed reasonably well despite having to absorb some of the pain of rising costs as they engaged in a price war with Aldi and Lidl.

As William Woods of Bernstein points out, Tesco was down less than 10% until Liz Truss and Kwasi Kwarteng “unleashed hell” with the disastrous mini-budget. The stock was dragged down in the subsequent margket turmoil, ending the year almost 24% lower.

Sainsbury’s fell by 20% and struggled earlier in the year thanks to its exposure to non-food with Argos, amid a gloomy outlook for discretionary spend.

Shore Capital downgraded Tesco and Sainsbury’s, as well as M&S, during the year, noting their inability to pass on inflation in full to shoppers.

M&S, like Next and Primark owner Associated British Foods, was also caught in a sell-off of apparel high street retailers (with online players Boohoo and Asos hit particularly hard). However, the travails of online partner Ocado provided a double whammy for M&S, with the stock almost halving in value.

Demand for online drifted away from pandemic highs, and basket sizes also dwindled for Ocado as consumers managed budgets. The trend also hit Naked Wines hard and saw Parsley Box delist after just 21 months on the AIM market.

Ocado also formed part of a wider tech sell-off. Woods notes the stock is tightly correlated to bond yields, which rose sharply in 2022.

“These growth companies aren’t delivering growth and they are still unprofitable, which is pretty challenging,” he says.

It’s the same story for two other big growth names in the US: Oatly and Beyond Meat (both down about 80%).

“At the beginning of the year, the capital markets turned, there was no longer any interest in unprofitable companies in an inflationary environment,” says Woods. “Plus, some of these names were big Covid beneficiaries that have now come off.”

Woods points out the likes of Deliveroo, Just Eat Takeaway, HelloFresh and Delivery Hero are all down somewhere between 50% and 60%. “It is actually quite a tight range, so nobody has been hit particularly harder than anyone else.”

Embattled THG had another bad year, plunging another 78% and taking its market cap from £5bn-plus when it floated in September 2020 to about £660m, amid concerns over corporate governance and scepticism of the value of the Ingenuity technology division.

THG cut full-year sales and profit expectations in September and Japanese investor SoftBank walked away from its investment in October, taking a £450m loss in the process.

With 2022 over, another year of uncertainty beckons, though the FTSE 100 shrugged off gloomy predictions to open the new year at a seven-month high. The tech stocks that took a battering in 2022 also scored early jumps, with Just Eat Takeaway up 10%, THG 8.4% and Ocado 6.1% on the first day of 2023 trading.

Clive Black notes the ongoing difficulties but also offer some cautious optimism.

“From an investment perspective, you are always looking for the darkness before the dawn, and we haven’t reached that yet,” warns Black. “Maybe by April we’ll get to the point where we think there are brighter times ahead even if they haven’t arrived.

“The second half of 2023 should be brighter as inflation starts to fall, but we are looking at quite a prolonged recession.”