At the risk of repeating myself even more frequently than I normally do, may I begin this newsletter with the observation that 2022 may come to be seen as the end of an era in economic policy terms. A prolonged period of low interest rates (initially in response to the banking crisis of 2008, and more recently to combat the economic impact of the pandemic) had fostered speculative conditions in a range of investment markets, from so-called safe government bonds, to far more esoteric vehicles, such as crypto currencies and “non-fungible tokens”.
As Covid-19 waned, a reversal of the fiscal and monetary stimuli was to be expected, but the Russian invasion of Ukraine made the process harder to manage. Inflation in many countries ended the year at more than double the rate expected a year earlier, reaching levels not seen since the 1980s. The resulting squeeze on consumers’ spending power created an increasing headwind for economic growth. All major asset classes fell. 2022 was the worst year for stocks since the Global Financial Crisis in 2008, and the worst year ever for global bonds, which fell by 16%.
2023 began with interest rates and economies poised close to potential turning points. In the case of rates, after a flurry of increases in late 2022, we may be near a peak, even if the shape is likely to be more like Table Mountain than Everest. In the case of economies, stagnation or moderate recession is widely forecast for part of 2023.
Both 2022 and this year-to-date have been punctuated by bouts of optimism. The tendency remains to travel hopefully with investors holding out for an interest rate reversal. This is an innately human response. There is plenty of belief that 2022 was an aberration and that we shall return to the recent normality of low inflation and low interest rates. But if there are risks to the contrary, then there are important ramifications for equity investors. 2022 had the effect of taking the froth out of the broader stockmarkets, but valuations remain at or around the levels of 2019. We are effectively back to where we were when this bull market was 10 years’ old.
The recent death of Larry Nelson, doyen of the Brewery Manual, caused me to reflect upon my short-term pessimism for cask ale and the pub industry. He thought that you should tell the truth as best you can, because, in the long term, the truth benefits the whole, even though some may not like it at the time. The Manual’s total brewery count was always more modest than other estimates, but, as early as 2017, Larry was warning that numbers had peaked. Others, including many within the Campaign, were celebrating a seemingly endless boom as microbreweries kept on popping-up. They only read the euphoric media releases: all good news and no bad.
Now, with breweries closing at a steady rate, we are seeing a come down from that artificial high. Over-confidence inflated a crowdfunded bubble that had to burst. According to the media, the same is now happening to pubs. The stories are of pub businesses that are failing in the current climate: many are closing for good, but there is no need to exaggerate. There are successes and these need to be celebrated as well: note the full context. The Hospitality Monitor reported a net decline of 1,611 licensed premises in the fourth quarter of 2022, with nearly nine in ten fourth-quarter closures occurring in the independent sector.
But, if you look carefully, the slightly better news is that community, food, and high-street pubs had a net decline of less than 1%. Moreover, independent operators and some of the larger pub chains and family brewers are continuing to add to their estates, albeit carefully and selectively.
As we all know, beer is part of the social fabric of our lives and local pubs, restaurants, and other independent businesses are the lifeblood of our communities. It may seem dark for the industry at the moment – and the decline of cask ale shows little sign of abating – but there are shards of light attempting to shine through.
During the last twelve months we attracted 48 new members but saw 86 leave. Unfortunately, 31 died, we send our sincere condolences to their families and friends. Overall, therefore, Club membership fell by 69 and now stands at 2926.
With 2023 having begun at a time of privation for many, and widespread pessimism about the future, there is a chance that some of the longer-term positive drivers for growth in coming years are being overlooked. Markets are never constant; they change and evolve like the weather. Trends can sustain for months and years, perhaps even a decade, but not forever. 2022 was a reminder of this. Much of the downside may now be priced into share prices, but there is a risk that the decline in earnings and profits will be greater than currently anticipated.
The American writer and poet William Arthur Ward wrote:-
“The pessimist complains about the wind. The optimist expects it to change. The realist adjusts the sails”.
The environment is going to remain extremely difficult for businesses in our industry: all we can hope is that this is already reflected in valuations and that beer drinkers navigate their ways back to the pub. As we all know, listening to the news and reading some of the headlines can be a miserable experience. The reality of successful investing, however, is to remain patient and remain long term.
As always, I wish to thank my fellow Committee members for their generous support during such a difficult year, the Club’s ever efficient and proactive administrative team at Allens, our brokers and advisors, and not least you, the Club’s membership, for your feedback and encouragement and contributions.
John Hattersley – Chairman – CAMRA Members’ Investment Club