2021 – a Market Review

2021

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. 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. 

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. 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. Even though it plummeted by nearly 40% at the end of 2021, 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. 

The Bank of England increased base rates to 0.25% from 0.1% after the Monetary Policy Committee voted in favour of the first rise in three years. The rise is likely being driven by high UK inflation with prices rising at their fastest for many years.

Outlook for 2022

Markets will continue to grapple with many of the same factors and forces that have been present in 2021. 

As the emergence and rapid spread of the Omicron variant has shown, the COVID pandemic is not over. Many countries in Europe have re-introduced restrictions and England has moved to ‘Plan B’, which includes guidance to work from-home and makes facemasks mandatory again in most indoor public places. Countries will obviously revert to full lockdowns only as a last resort but the possibility that the virus could wreak further damage on economies and corporate profits cannot be ignored. 

The tapering and then the end of quantitative easing is in prospect for 2022. In addition, soaring rates of inflation make the continuation of negligible and negative interest rates more and more untenable. Financial markets have operated in an environment of ultra-low bond yields and interest rates since the end of the Global Financial Crisis in 2009 and the transition to higher rates, if it comes, could be challenging. 

Of course, the biggest determinant of the likely path of interest rates in 2022 is inflation. For most of 2021, central banks maintained that the upward trend was ‘transitory’, caused by an unsustainable explosion in demand following the end of lockdowns which had temporarily overwhelmed supply chains. With every new data point that emerges, however, that argument is undermined. Inflation rates could spike even higher in the short term before settling lower than they are at present, albeit at above the 2% level targeted by both the Bank of England and the Federal Reserve. 

The prospects for economic growth in 2022 look hopeful, with the potential to moderate from 2021’s rebound level but still be solid. As always, however, there are risks and amongst them a resurgence of the pandemic, a squeeze on consumer spending caused by higher inflation and, in the UK, higher taxes, or an exogenous event, such a property-related financial shock in China or military conflict. However, excessive tightening of monetary policy could turn a slowdown in economic growth into a recession and also expose the high levels of debt embedded in the financial system. It is an exceptionally difficult balance to get right.

Source data: Bloomberg, JP Morgan Asset management, data as of September 2020 and September 2021. Forecasts are not a reliable indicator of future performance. Selected assets, 10-15 year average annual expected returns.

This document is issued by Attivo Financial. Attivo Financial is a trading name of Attivo Financial Services Limited (Company No. 05927588) which is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 462105). Attivo Financial Services is part of Attivo Group and registered in England and Wales. Registered Office: Honeybourne Place, Jessop Avenue, Cheltenham GL50 3SH, UK.