A relaxed read on the issues of the day
The second year of the Covid-19 pandemic has proved to be nearly as dramatic as the first for global financial markets. We have witnessed the conclusion of a contested US presidential election, an attack on the Capitol Building, historically high inflation, supply chain disruptions and new Covid-19 variants. Nevertheless, none of these events have stopped many stock markets from reaching all-time highs.
2021 was another exceptional year for equities, with US equity markets especially strong, supported by highly accommodative fiscal and monetary policies. The S&P 500 gained 27% with Energy and Real Estate the best-performing sectors, surging more than 40% each. Technology and Financials also rose more than 30%.
European banks had their best year in over a decade, rising 34%; and the FTSE 100 was up nearly 15%. However, emerging market equities suffered loss of 5%, which was particularly painful given the strength of developed markets (global equities were up 20% over the year). China’s increased regulatory pressure on its big online firms and a crisis in its property sector wiped over a trillion dollars off its markets this year, impacting returns for both emerging markets and the Asian region. Alibaba, China’s equivalent of Amazon, has seen its share price fall nearly 50% and the Golden Dragon Index of US listed Chinese stocks is down 42%, while in the property sector, Evergrande has become its biggest ever default. Elsewhere in emerging markets, the freefall in the Turkish lira shattered all kinds of records, as President Recep Tayyip Erdogan’s intensifying campaign for a lower interest rate plunged the country into a deeper crisis. The Turkish lira ended 2021 having lost 44% of its value against the US dollar, 19% in the last week of the year alone. Investors who had high hopes for emerging markets coming into 2021 have been disappointed.
The energy crisis was one of the biggest stories in 2021 and has been a leading contributor to the high levels of inflation. Energy demand surged as countries opened up from pandemic restrictions, which together with depleted reserves and lower supplies from Russia to western Europe, has sent wholesale gas prices soaring. Consequently, commodity markets have excelled with oil and natural gas gaining 50% and 40% respectively. Cooper, Zinc, Aluminium, and agricultural markets have also made strong gains this year.
As 2021 came to a close, central banks expressed greater concern about inflation. With headline figures around 7% in the US and 5% in the UK and continental Europe, inflation has risen at its fastest pace in a decade. The pandemic and subsequent policy measures have had a significant economic impact on demand, supply and labour, which collectively have caused a wave of inflation, unlike anything central bankers have been able to achieve in decades. With US inflation reaching its highest level since the 1980s, the Federal Reserve announced in December that it will be ending its bond purchases sooner than expected and looking to raise interest rates. Meanwhile, the Bank of England hiked interest rates in December, becoming the first G7 central bank to do so since the start of the pandemic. Unsurprisingly, bond asset classes struggled against a backdrop of higher inflation and looming interest rate rises, and those headwinds look set to continue in 2022.
Looking at property, inflation has also been evident in the house market. Within the UK, lower interest rates, a stamp duty holiday and a pandemic-induced re-think on space and work/life balance saw house prices grow at the fastest pace in 15 years. The price of a typical UK home rose to a record high of £254,822, up £23,902 over the year. With interest rates likely to move up in the coming year, property prices could prove to be more subdued from here.
Going into 2022, the growth outlook suggests equities could have more to offer investors, while bonds continue to look challenged. With central banks and investors adapting to a different environment, volatility could continue to surprise, with investors experiencing a bumpier ride as they look to capture returns.