What worked in equity markets in 2022

I share three characteristics of companies that outperformed last year and why these same characteristics should matter again in 2023.
Stephen Arnold

Aoris Investment Management

The global equity market declined by 12.7% in AUD in 2022, its worst annual return since 2008. Yet it wasn’t equally tough for all businesses. 

One dimension through which to look at markets is by sector, and through this lens picking last year’s winner is easy – it was all about Energy. Energy was the best performing sector in 2022, taking the top spot for the second consecutive year. Making 2022 a particularly unusual year, Energy outperformed the second-best sector by an extraordinary 41.3%. This is starkly illustrated in the charts below.

Looking back over the last 20 years, the average difference in annual returns between the two best performing sectors was 8.0%, and the widest gap before 2022 was 20.4%. 

Clearly, for many investors, 2022 was all about Energy.

Let’s rotate the lens now and take a look at what company characteristics were associated with superior performance last year. 

Quality, particularly balance sheets, valuation and earnings resilience were all correlated wtih outperformance last year. 

Conservative balance sheets mattered once again in 2022

For a roughly 15-year period, from the onset of the GFC in 2008 to the re-emergence of inflation in 2022, we have lived in a period of ultra-low interest rates. This created the impression that debt is almost free, even to risky borrowers, and would be forever.

Debt, or financial leverage, is like the speed with which you hit a speed bump. At 20 km/hr your car will be fine; at 80 km/hr your car will get rattled but be okay; while at 140 km/hr you’ll cause it permanent damage.

The rise in interest rates in 2022 was a reminder of the value of conservative financing. Of all non-financial companies globally, 18% have a ratio of debt to EBITDA greater than 4x. 

This group of companies underperformed the broader market in 2022 by 14%.


From early 2020, when central banks sharply lowered interest rates in response to the onset of the pandemic, we went through a period when richly valued businesses markedly outperformed. That party ended as interest rates rose over 2022 and the importance of valuation reasserted itself.

Companies whose P/E multiples exceeded 50x at the beginning of 2022, which accounts for about 20% of the broad universe of international companies, underperformed the market average in 2022 by 22%.

There were also valuation risks hiding beneath the surface in businesses trading on seemingly low multiples of earnings, but where the earnings themselves were bloated due to pandemic-related spending, such as in consumer electronics and home improvement sectors. Once the COVID-19 boost to earnings disappeared, prices relative to earnings were much higher than they had appeared.

Companies whose earnings had increased by 100% or more over the prior two years accounted for 27% of all global companies.

This group underperformed the market average by 8% in 2022.

Resilient earnings proved valuable in 2022

Highly cyclical businesses whose earnings turn negative during periods of economic stress present investors with additional risks. The underlying value of these companies may decline in such times due to management error. These unforced errors can happen when management chooses to cut headcount, investment or customer service levels to protect near-term earnings, but in a way that damages the company’s long-term competitive position and earnings potential.

25% of the 3000 largest companies globally have reported a loss in at least two of the last 15 years.

This group of businesses underperformed the market average in 2022 by 10%.

What this means for 2023

In some important respects, 2022 was a normal year. The company characteristics that investors were best served avoiding last year have been reliably associated with underperformance over a long period of time. Let’s take them in turn.

  • Balance sheet quality – companies with net debt/ EBITDA >4x have underperformed in 13 of the last 15 years, by an average of 6.9%.
  • Valuation – companies trading on a PE of >50x have underperformed in 12 of the last 15 years, by an average of 6.0%.
  • Resilient earnings – companies that have lost money in two or more of the prior 15 years have underperformed the market in 10 of the last 15 years, by an average of 2.0%
We believe that in 2023, investors should once again avoid these characteristics, and instead choose companies with strong balance sheets and resilient earnings trading on modest PE multiples.

How we reflect this in the Aoris portfolio

The Aoris portfolio owned no Energy companies in 2022 and we never will, yet we managed to do slightly better than the benchmark last year. We own conservatively financed, consistently profitable, growing businesses trading on what we consider attractive valuation multiples. Like to learn more? See our 2022 Annual Letter to Investors. 

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pdf attached
2022 Annual Letter.pdf
This report has been prepared by Aoris Investment Management Pty Ltd ABN 11 621 586 552, AFSL No 507281 (Aoris), the investment manager of Aoris International Fund (Fund). The issuer of units in Aoris International Fund is the Fund’s responsible entity The Trust Company (RE Services) Limited (ABN 45 003 278 831, AFSL License No 235150). The Product Disclosure Statement (PDS) contains all of the details of the offer. Copies of the PDS are available at aoris.com.au or can be obtained by contacting Aoris directly. Before making any decision to make or hold any investment in the Fund you should consider the PDS in full. The information provided does not take into account your investment objectives, financial situation or particular needs. You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary. You should not base an investment decision simply on past performance. Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.

1 topic

Stephen Arnold
Managing Director & Chief Investment Officer
Aoris Investment Management

Stephen founded Aoris Investment Management in 2017 and has been investing internationally for around 25 years. Prior to Aoris, Stephen was Head of International Equities at Evans & Partners where he directly managed $1bn of client assets.

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