Friends,
I hope that all is well with you and yours.
Unfortunately, there has been a slight change in our schedule for reasons relating to my daughter. There is no reason for worry (she is absolutely fine), but a few things happened this week, and my wife and I had to move things around as a result. Given the circumstances, I suspect that you understand.
But I will be damned if I do not get anything of value delivered to you. So, albeit later in the day than usual, here are a couple of 2022 financial takeaways of the kind that has been exclusive to premium subscribers, available for all. In two weeks’ time (I will be traveling internationally for work next week), they will get the 2023 H1 outlook to assist with early-year strategic decision-making. If you want it too, alongside a bunch of other goodies, now is the time join in.
On the note of subscriptions, I have decided to write a paper to make up for the lack of January premium content. Featuring a strategic cheat sheet of sorts, it will become available exclusively to paying subscribers. At the end of the proverbial day, you are giving me your hard-earned dollars and dimes. As I have said many a time before, I want to ensure that you get a significant return on your investment. So far this year, if I am to be self-critical, that has not been the case.
Anyway, let us get into today’s topics.
Disclaimer for free subscribers: the following does not go into detail on inflation as it has been discussed in-depth for premium subscribers many times already.
2022 in Markets
To borrow a line from Simeon Spiegel, the last three years have been a ping pong of external shocks. Yet 2022 hit more like a racket to the face; war, inflation, soaring energy costs, declining GDP growth, rising interest rates, and a cost of living crisis, caused market turmoil.
Evidence suggests that many companies struggled to decipher what the implications would be even for the short-term. That it was bad was obvious to anyone that bothered looking, but between Fed premonitions of fire and brimstone, and Wall Street counterclaims to protect client investments, guidance variance was immense.
To make matters worse, much of the strategic advice provided – particularly up to late Q2/early Q3 – suffered from continuation bias (i.e., a bias to continue with the original plan in spite of changing conditions; a common issue in strategic planning). For me personally, this was perhaps on no larger display than when James and I spoke at the Cannes Lions festival in early June. Among the presumably hundreds of speakers, we were the only ones discussing what was happening to the global financial climate.
Granted, the behavior of strategists at a conference is not necessarily indicative of the behavior of their companies, but by then markets had already sunk deep. And it was obvious that many businesses were slow to adapt strategically, be it out of ignorance, hubris, complacency, a belief that the pendulum would soon swing back, or whatever else.
Shock Stocks
Because a serious downturn it was. 2022 was, to be blunt, a shit year for financial markets (notable exceptions being energy stocks and a few individual companies, such as Super Micro Computer (+86%), Vipshop (+63.7%), and Pinduoduo (+41%)). Even the behemoths that so commonly were believed to be on perpetual growth journeys saw their market caps sink dramatically; Apple ended at -26.8%, Microsoft -28.1%, Alphabet at -39.0%, and Amazon at -49.5%.
(Alphabet is a particularly interesting one from a strategic perspective. Online advertising has reached an inflection point and it is becoming clear that its future upside is limited. The question, then, is what Google’s main source of growth will be going forward. Cloud, it would appear, may not be it as the company’s offering has struggled to gain ground compared to that of Amazon.)
As bad as the year was for large companies (S&P500 down 19.4% while posting its worst first half of the year since 1970), tech in general was worse (Nasdaq Composite Index -33.1%). But even that could not match fintech, with Global X Fintech ETF at -52.0%, ARK Fintech Innovation ETF -65.0%, and F-Prime Fintech Index -63.4%.
For individual companies, the ones that had skyrocketed during the pandemic demand acceleration came crashing down hard. Affirm lost 90.3%; many of its rivals followed closely behind. Wayfair’s value fell 82%, which was on par for the course for notable eCommerce players. The story became only too familiar.
Strategic implications:
Underperformance is obviously far too large a topic to summarize in a few nifty sentences. What should be done as a result, or what one can expect to have to deal with, thus largely depends on context (as ever). However, there will undoubtedly be a premium on commercial creativity – the increased costs have to be mitigated somehow. Contrary to popular commentary, merely putting up prices simply will not cut it. Premiums have to be justified, for one, but share loss is likely to follow price increases either way. The question is how much.
It is important to not get fooled by topline demand figures. Although they have remained relatively stable of late, shifts are happening beneath. As became obvious during Q3 and Q4, more and more buyers are prioritizing necessities while replacing branded goods with cheaper substitutes, white label goods, and commodities. Worryingly, consumer purchases are also increasingly financed through credit; debt has soared. Sooner or later, it has to be paid. Given that energy costs are going up (albeit slower than anticipated due to the unusually mild winter) alongside interest rates (make no mistake, plenty more is to come), it would be wise to prepare for a potential drop in demand. Especially as private savings accounts have been dwindling fast.
VC and M&A Activity Slows Down
The influx of venture capital totalled $445 billion globally in 2022, a 35% pullback YoY. For reference, this represented a steeper decline than that experienced after both the 2008 financial crisis and the dot-com bubble of the late 1990s. While the total remains very high by pre-2021 standards, H2 saw a significant change in the investor narrative; a number of marquee incubators, accelerators, and VC providers informed their companies that, effectively, they were on their own at least until 2024. Potentially, this could mark the end of the profitless prosperity era.
Meanwhile, mergers and acquisitions fell as companies tightened their belts. The total value of (announced) global deals dropped 37% YoY, albeit much like VC off a record high 2021 figure. That is the biggest decline since 2001, when the global drop amounted to 50% as a plethora of countries went into recession.
Without getting ahead of ourselves (a deeper look is to come in a fortnight), I would expect M&A to increase in 2023. Firstly, the deals that were created will have taught companies valuable lessons on how clever structure can reduce market volatility. Secondly, as VC becomes more expensive and difficult to come by, a number of previously fast-growing companies will look to be acquired to provide fresh capital (and an exit). Thirdly, regression towards the mean remains a statistical reality.
Strategic implications:
The consequences of the VC well running dry should be obvious. If your company is reliant on external capital, you will be entering the Age of Maguire; someone will eventually ask you in more or less brusque tones to show them their money. With growth at any cost no longer an option, strategic changes may have to follow.
When it comes to M&A, the current financial climate will provide opportunities to obtain companies, so to speak, on the cheap. The timing could thus be excellent for additional parallel safe-to-fail experimentation for firms with significant portfolios and fiscal strength. That is not to say that all strategists will have a say on inorganic growth, but for those that do, it should be in play.
Should acquirer demand accelerate faster than anticipated, the right strategist at the right start-up may also use it as leverage, potentially making up for lost ground in the year that has been.
More on these matters to come.
As mentioned, there will be no Strategy in Praxis next week due to international work and thereto related travel. However, in 14 days from now, the newsletter that will arrive in your inbox will have a whole new (and improved) look.
Until then, have the loveliest of weekends.
Onwards and upwards,
JP