In our first quarterly investment report of 2022, we take a look back at the economic ups and downs of the last year and what they may reveal about the year to come.
A review of the markets in 2021
2021 saw many challenges for investors across the globe. The tug of war between Covid variants and vaccines, created uncertainty in the markets. Adding to this uncertainty, the Chinese government clamped down on their biggest companies in a bid to stake the State’s economic claim, and Chinese property giant, Evergrande, found itself on the brink of collapse. Rising inflation also induced concern across many economies who experienced their highest levels in 30 years.
Yet, despite these disruptions, equity markets managed to deliver double digit returns in 2021. In the UK, equity markets delivered just over 17%, up its decline of 10% in 2020. Similarly, the US equity market saw an impressive 28% increase, with European markets achieving 18%. The emerging and Asian equity markets ended lower, mainly due to China’s sell-off early in the year, increased periods of lockdown, and low vaccine rollout.
Conversely, UK government bonds (gilts) suffered much volatility and ultimately lost money over the year. Broad market index-linked gilts were down 5% by the close of 2021, but reached a low of 9% during the year. This impacted UK credit markets, which saw a fall of 1.5%.
A challenging quarter for Active Management
Despite equity markets performing well over the year, Q4 was a challenging period for active managers, both in the US and UK.
In the US, markets were being led by a narrow group of stocks. Yet, unlike 2020, which saw the so called ‘FAANG’ stocks dominate, 2021 was governed by Moderna, Avidea Technologies and a selection of oil companies.
The UK markets faced a different challenge to the US with several funds having a bias towards weaker performing smaller mid-cap markets, as well as macro forces driving returns, such as Omicron and interest rates.
Our outlook for 2022
Although there were significant economic challenges in 2021, we are sanguine about the opportunities for economic growth in 2022. With equity growth jumping last year, we expect it to moderate over this year while still remaining solid ground for investors.
Potential issues for investment growth could be caused by further disruptions from the pandemic, or an exogenous event, such as a property related financial shock in China, or a military conflict. However, the biggest threat to global economies is inflationary rise and how central banks respond. Central banks will be walking a tight rope over this coming year. Do nothing, or too little, and inflation rates may rise far and fast. Yet, 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. For this reason, we remain neutrally positioned on equity markets.
Against our most likely back drop of robust economic growth and lingering inflation, we expect bond markets to trend higher in 2022. Accordingly, we will maintain our short duration bias on bonds and gilts.
If you would like to watch our full quarterly report, please click here.
PLEASE NOTE: The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy.