Financial Markets Review For 2021 & A Look Ahead To 2022

Despite double-digit returns from most equity markets, 2021 still presented plenty of challenges for investors. A tug-of-war raged between COVID variants and vaccines, many economies experienced their highest levels of inflation for thirty years and, in China, the authorities launched a brutal clampdown on the country’s most successful companies whilst at the same time the world’s most indebted property developer teetered on the brink of collapse.

At the time of writing, UK equities have provided a return (including dividends) of just over 17%, more than erasing 2020’s decline of 10%. The UK economy is expected to have grown by 6-7% in 2021 and corporate profits have rebounded. The UK has also been at the forefront of the global vaccine rollout.

Many overseas stock markets recorded even bigger gains, headed once again by the US which has risen by 30% in sterling terms. An eclectic mix of a vaccine-maker (Moderna), a technology behemoth (NVIDIA) and a clutch of oil companies have all seen their stock prices more than double in 2021, whilst Tesla joined the elite club of companies valued at more than US$1trn. At the other end of the performance table and for the reasons above, Chinese equities were down in 2021.

Even though the pledges made at November’s showpiece COP26 climate change conference in Glasgow disappointed many, the emphasis on environmental, social and governance (ESG) factors amongst investors became an even more powerful force in 2021. Fund managers ignore this trend at their peril.

Investors in Government bonds have lost money in 2021, albeit not as much as many would have expected given the degree to which interest and capital repayments have been eroded in real terms by soaring inflation rates.

At the beginning of 2021, 10-year UK gilt yields stood at just 0.2%. As growth and inflation picked up, yields rose six-fold to 1.2% and at worst broad gilt market indices were down by almost 9%. It is perplexing therefore that, even as the UK inflation rate has continued to rise, 10-year yields have since tumbled to 0.75%. Losses for investors in UK gilts have narrowed to just 2%.

The economic and monetary backdrop in 2021 could not have been more benign for investors in equity markets. The rollout of vaccines allowed economies to re-open, releasing a surge of pent-up demand. Indeed, that demand has led to shortages in many parts of the supply spectrum, ranging from labour to semiconductors to energy. Unsurprisingly, prices have risen accordingly. The price of shipping a standard 40ft container from Shanghai to Europe has increased approximately fivefold in 2021. Even though it has plummeted by nearly 40% over the last six weeks, the price of gas is still 50% higher than where it started the year, as is the price of oil.

Despite buoyant economic growth and rising inflation, both fiscal and monetary stimuli have remained in full flow. Central banks have seemed wary and reluctant to withdraw the punchbowl. The US Federal Reserve finally began to scale back its quantitative easing programme in November but will continue to buy bonds until June next year. Here in the UK, however, we may have seen a slight change in this policy with the Bank of England marginally increasing interest rates at their last meeting.

Looking ahead to 2022

At this time of year, many investment managers, journalists and experts make predictions for the year ahead. Some might get lucky and be partially correct, most will be wrong but it certainly won’t stop them from having another go the following year.

The last few years have shown us again that we have no idea what is going to happen in the short term and it’s pointless, even dangerous pretending we do. Over the long term, markets have always gone up and investing in a diverse portfolio of all the biggest companies in the world while ignoring short term news and predictions continues to be the best way to grow wealth over the long term.

As we accept we don’t know what will happen in the short term, we believe it is important to have a clear financial plan in place so that it doesn’t matter to your life. A financial plan should be flexible enough to deal with short term market volatility or even more extreme events as we have recently seen so whatever happens with investment returns you can still enjoy your lifestyle, confident you will be ok in the long term.

We can’t stop investment managers giving predictions and if you want one from our investment partners, Square Mile acknowledges a lot of uncertainty and is as likely to be right as any of the others.