A review of the markets in 2021
2021 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.
However, despite this, most equity markets provided very healthy double-digit returns. UK equities delivered just over 17%, more than erasing 2020’s decline of 10%. The US market had annual double-digit returns, providing close to 28% and Europe delivered a very healthy 18%.
The Emerging and Asian markets ended the year down, due to China selling off and many Asian countries either still being in ‘shut down’ mode or having very low vaccine rollouts.
In the bond markets, for the first time in a long time, investors in UK Government bonds, or gilts, lost money over the year. The broad market gilt index closed the year down c. 5%, although it was down close to 9% part-way through, which was a very volatile 2021 for gilt yields. This overall lift in gilt yields also impacted the UK credit markets, but to a lesser extent as they fell by 1.5%.
A challenging quarter for active management
Despite the equity markets providing a bumper series of returns during 2021, it was a difficult Q4 for active managers, particularly within the US and UK.
For the US, this was down to the market being led, once again, by a very narrow group of stocks. However, this time it was down to an eclectic mix of a vaccine-maker (Moderna), a technology giant (NVIDIA) and a clutch of oil companies, rather than the FANG stocks that we all got to know and love during 2020.
In the UK, the challenge was slightly different. Firstly, it was down to several funds having biases towards the weaker performing small and mid-cap markets, and, additionally, due to macro forces driving returns such as interest rates and Omicron, rather than underlying fundamentals.
Outlook for 2022
We are fairly optimistic about the prospects for economic growth in 2022, expecting it to moderate from 2021’s rebound level but still be solid. As always, however, there are risks and amongst them, we would cite a resurgence of the pandemic, a squeeze on consumer spending caused by higher inflation and/or maybe even an exogenous event, such as a property-related financial shock in China or military conflict.
However, the big threat to continued economic growth is inflation and particularly how central banks respond. Do nothing or too little and the inflation genie might well and truly escape its bottle. However, excessive tightening of monetary policy could expose the high levels of debt embedded in the financial system and take the steam out of any equity market rally.