Market Overview & Outlook Quarter 4 2021 (1 October – 31 December 2021) & 2022 Investment Outlook – Investments Deliver Strong Performance

2021 was another good year for investment markets, particularly for US equities which delivered another stellar performance. This impressive performance was driven primarily by the mega caps in the US which masked some lacklustre performance elsewhere amongst US equities. International equities also notched up impressive gains in continental Europe and the UK, whilst China and many emerging markets struggled. Bonds had a difficult year with gilts and other sovereign bonds struggling in a climate of rising inflation and expectations of interest rate rises.

In respect of the last three months of 2021, October and December were positive months for equities, whilst November witnessed a market correction with concerns in respect of the Omicron variant of COVID-19 around the world, as well as jitters around higher inflation than anticipated and upward pressure on interest rates. Indeed, the Bank of England announced an interest rate rise to 0.25%, showing a new direction of travel and intent to dampen inflation expectations heading into 2022.

Market Outlook for 2022  

As far as the markets are concerned the impact of coronavirus should reduce as we move into 2022. This optimistic assertion is based on the fact that whilst the number of infections, particularly of the omicron variant are surging, the level of vaccinations continues to grow in countries around the world and it appears this is contributing to a full in the number of new deaths and hospitalisations. Oral antiviral pills may potentially play a valuable role here in the future; in addition, governments are in many cases moving away from zero tolerance approaches to the virus as there is a growing acceptance that societies need to adapt and learn to live with it.

It also seems likely that herd immunity is playing an increasing role in containing the impact of COVID-19 in many parts of the world. Overall, coronavirus should act as less as a drag for global growth in 2022 as governments seek to keep economies open; moreover, many sectors have adapted to the new reality by changing their business models and propositions to customers.

US Markets Remain Key for Investors

Since the US stock market accounts for over 60% of global equities by market capitalisation, the US economy is key to the overall direction of global markets in 2022. The US economy is likely to slow down in 2022 as a result of less fiscal and monetary stimulus, combined with labour and supply shortages. In turn these shortages are likely to impact both consumer and business spending. Nevertheless, the US economy should continue to make progress during the year, potentially growing in line with its long-term trend of around 2%. Negotiations are ongoing in the US in respect of additional spending on infrastructure, childcare and education over and above the $1.9 trillion American rescue plan. Further stimulus would likely be welcomed positively by the markets despite record high debt to GDP ratios not seen since Second World War.

Impressive Corporate Earnings

Much of the strong performance of markets in 2021 can be attributed to a strong recovery in corporate earnings. There were particularly strong profits reported in sectors such as technology and healthcare, but it is notable that many cyclical sectors have also rebounded more recently. Much of the uncertainty from 2022 onwards is a consequence of slowing economic growth, inflationary pressures on wages, a climate of rising interest rates and increased levels of taxation. Accordingly, companies will need to innovate and focus on productivity, as well as contain costs if they are to continue delivering on earnings growth in the years ahead. Although valuations in some parts of the market may Returns in the short-term, the outlook for equities remains positive underpinned with strong economic fundamentals and corporate profitability.

Inflation Risks

Inflation is likely to be a key theme discussed in 2022 since it will influence central bank decisions on interest rate policy. Most importantly, central banks need to balance carefully responding to inflationary threats by showing a willingness to increase interest rates with patience and avoiding increasing interest rates prematurely too much. Whilst inflation has surged in many parts of the world in 2021, this has been driven by a surge in demand and lack of supply with the reopening of the global economy after the lockdown during the pandemic. As such, many of these inflationary pressures should subside in the coming months as the global economy normalises.

Growth vs Value Stocks

There has been much discussion with regard to the relative attractiveness of growth and value stocks. After many years of underperformance, value stocks staged a partial recovery in 2021. This may potentially continue in 2022 if economic activity remains buoyant and interest rates rise in a controlled and gradual manner. However, economic forecast points to a slowing pace of economic growth in the years ahead and this is likely to favour growth stocks, such as technology. Spending is likely to continue supporting both home and office IT systems in the new hybrid working environment. There are also interesting opportunities in respect of climate change, as well as the rollout of the 5G network. In many cases, technology can help save on labour costs which is particularly relevant as wages are rising significantly in many business sectors. This may favour stocks and sectors such as robotics and automation.

Whilst the US equity market contains many excellent companies and is likely to remain as the call of global equity portfolios, other developed markets and particularly emerging markets are now at close to their cheapest level relative to the US for the last 20 years. As vaccination roll outs around the world continues, this should lead to a more synchronised global recovery, particularly if trade tensions abate and the US dollar weakens. In turn, this could potentially reward a greater allocation to international equities, such as continental Europe and parts of Asia.

Healthcare – Investment Opportunities

After a strong performance at the start of the pandemic, the returns from health care compared to the rest of the act equity market were lower for much of 2021. Based on the future outlook for healthcare with ageing populations and an abundance of innovation in medical science, as well as relatively attractive valuations, healthcare appears to offer attracted prospects for 2022.

Mega Caps Dominate Indices

Over the last few years, global markets had been driven higher by a surge in the share prices of mega-caps, such as Apple, Microsoft, Amazon, Tesla, Alpabet (Google), Nvidia and Meta Platforms (Facebook). These seven companies account for approx 28% of the S&P 500 index, which itself represents around 80% US stock market. This has tended to favour passive investing particularly in the US since an active manager has struggled to hold enough of these few companies in portfolios. However, with increasing regulation around the world and scrutiny of these large global businesses, it is likely for them to find it more difficult to continue growing at the same rate. In turn, this should favour the stock selection which a diligent active manager can employ in constructing an investment portfolio.

Political Issues

Of course, political issues will continue to weigh on investor’s minds in 2022. Climate change is likely to be towards the top of the list as pressure continues on governments to meet commitments discussed in Glasgow at Cop 26, particularly with regard to future emissions and decisions on financing initiatives. A disorder the energy transition could result in a surge in commodity prices, an issue to which global governments will need to be alert.

US/China and EU/China relations will remain under the spotlight. Politicians in the West will need to consider carefully whether China is a negotiating partner, a competitor or rival in different spheres of operation, with Taiwan a possible flash-point. Sino relations are particularly important with the ongoing global supply chain issues since it is challenging to balance an increase in capacity on the one hand with increasing protectionism in many countries on the other.

Russian troops on the Ukrainian border is another pressure point, especially with NATO now as a less cohesive force than during the Cold War.

There are also mid-term elections in the US and elections in France, both which could alter the political landscape during 2022.

Closer to home, the UK government is engaged in ongoing discussions with the EU in respect of outstanding breaks it issues. It will be important for both sides to resolve these issues in the interests of future economic growth and mutual interests. As far as the UK is concerned, once coronavirus ceases to dominate the news, the path of the UK economy in a post-corrected world is likely to come in for greater scrutiny. This will make it important for the UK government to demonstrate the benefits of breaks it with trade deals and leveraged the potential flexibility of trading outside the EU.

Bonds Face Headwinds

Fixed interest investments face headwinds in 2022 as the mood music for interest rates has changed to a climate of rising rates. This is significant as the price of the bond generally falls as interest rates and inflation expectations pick up. However, interest rates may potentially not increase by as much as some market participants anticipate over the next year or so. In turn, some bonds may potentially surprise and deliver a better return than expected. Furthermore, bonds are an important part of a diversified portfolio and can provide useful protection for equities in the event of a market correction.

Alternatives Assets for Diversification

Alternative assets such as commercial property, infrastructure and private equity are also worthy of mention for 2022. Each of these asset classes has its own unique characteristics and can provide further valuable diversification from conventional equity and bond portfolios.

2022 – Equity Returns Normalise

Overall, whilst the range of potential outcomes for 2022 is undeniably broad, our central view remains that returns from equity investments should outperform inflation and other asset classes even if volatility is higher than in recent years. This view is predicated on a generally favourable economic climate and a healthy corporate environment. However, after the stellar returns of 2021, 2022 is likely to see returns more in line with longer term averages as the global economy normalises.

Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500,

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