The Black Swans of 2022

Conventional logic is that black swan events are rare and infrequent, cannot be predicted (although they seem obvious in hindsight), and affect markets severely.

2022 seems to have delivered its fair share of rare, hard-to-predict and disruptive events. Whether or not they were black swan events, the cumulative effect has been devastating to many.

Because the name for a group of swans is a ‘bevy’, we’re calling 2022 a bevy of black swan events.

The bevy - where to start?

As if Covid wasn’t bad enough, 2022 saw in a gruelling war in Europe, a looming global recession, rampant inflation, Tech and crypto crashes, and so much more.

The world is grappling with climate change while undergoing a massive energy transition, at the very moment that Putin has exposed Europe’s reliance on Russian fossil fuels. To add irony to insult, hydrocarbon-based stocks were up massively in 2022 while almost everything else sank (take that, ESG warriors!)

Europe, of course, does not have a monopoly on conflict. Sabre-rattling has escalated over the Straits of Taiwan, where homegrown legend TSMC is pivotal to the future of the global semiconductor industry.

Supply chains which froze or even broke during the pandemic, are slowly unblocking. The travel, tourism and aviation industries suffered their own existential crisis but are now bouncing back quickly.

It certainly has been a big year.

You’d hope that - if all of this had to occur - it would do so at a time of relative geopolitical stability. Alas, that’s not the case.

These last few years have amplified deep divisions within the US, at a time when its global leadership has been most needed. China’s at times militant ascendancy is hard to deny, Russia has effectively gone rogue, and post-Brexit UK teeters on the brink. It’s not hard to reminisce about the decades of relative stability that we have enjoyed.

The digital elephant in the room

There is no escaping the tectonic effect that 2022 has had on the Tech sector. While it may sometimes feel that we are in uncharted territory, the truth is less dramatic. The current market correction is entirely ordinary - this may feel reminiscent of the Tech Wreck of 2000, but it is more a case of history rhyming, rather than repeating.

Indeed, this is the fourth major market correction of the last two decades. The century began with the bursting of the dotcom bubble in 2000. Then came the global financial crisis of 2008. By 2020 we were dealing with the acute phase of COVID, and now ultimately we have arrived at the 2022 market correction.

Yet, even after these events, Tech has still outperformed the broader equity markets by 40-50% on 5, 10 and 20-year views.

So, what’s next?

It is clear that all of the excesses of COVID in the tech sector are very quickly unwinding.

The idea that tech companies needed to staff up and spend more money has come unglued. Suddenly, Zoom and Peloton are just things you need some of the time, but not all of the time. And their valuations now reflect it!

At a macro level, interest rates and inflation are a major driver. The appetite for risk and the hunt for growth has been replaced by a flight to quality and a thirst for profits.

Remember, though, that this turn of the wheel from growth into value is itself just part of the same cycle, and eventually interest rates will top out and start to come down again.

In a strange way it may prove to be a positive thing that central banks are tightening so aggressively. It means they are better placed now to cut rates quickly in a crisis - a flexibility they have lacked for some years.

In this difficult (some might argue, more realistic) environment, many Tech transactions are either being pulled or are taking much longer to close, as investors sit back hoping for ever keener prices. Venture debt and convertibles are in, and equity is out. M&A is in, and IPOs are out. SPACs are … well, over (applause, anyone?). Watch for more M&A as companies consolidate market share and accelerate the path to profits.

Good deals are still getting done. In the boom, when money seemed free, founders didn’t always need intermediaries to get deals over the line. The balance has shifted this year, with Tech companies needing to deploy every trick in the book to raise capital and weave their way through the wreckage.

A final observation

Even in this most difficult of years there is everything to suggest continuing innovation by the Tech sector. This was the year, for instance, when AI moved into the mainstream. Likewise, virtual and augmented reality are well on their way.

Innovation continues unabated, regardless of market movements. And entrepreneurs are always ready to pounce.

2023 looks full of opportunity to us.