Economic recovery from the pandemic was the defining investment trend of 2021. Yet social restrictions haven’t gone away, and we end the year still under the cloud of Covid as a response to the fast-spreading Omicron variant has meant a tightening of rules.
With patchy reopening across the world, demand for goods and services quickly overwhelmed supply chains during the year as renewed consumer spending collided with supply shortages, lack of labour and logistical disruption. Inflation loomed, fuelled further by energy price rises, and although these look set to moderate as we move into 2022, they are likely to remain stubborn enough to force central banks to raise interest rates.
Regions made different rates of progress with Covid vaccination programmes. Defying sceptics who believed the nation would struggle to overcome the effects of the pandemic, India’s economy roared back – and the stock market responded. The nation offers scope for a substantial growth opportunity in the form of its fast and increasingly wealthy middle classes. The Modi government has also cut down on excessive bureaucracy, which has helped remove some of the previous headwind to growth. However, shares are no longer cheap having risen considerably this year as investors took note of the progress.
US equities also provided robust returns, as strong earnings saw many companies preserve profit margins in the face of rising costs. Large e-commerce and technology companies continued to thrive amidst a quickening and broadening of the digital revolution brought about by Covid. Apple was close to becoming the first $3T company, only 16 months after surpassing $2T. Microsoft and Alphabet also passed the $2T milestone.
As such, the tech giants have come to represent a huge part of the US stock market. As we noted in this article 'how-to-reduce-concentration-risk-in-us-shares', the ten largest names in the S&P 500 index make up nearly 30% of its market capitalisation, up from just 18% five years ago, which does mean investors may be increasingly reliant on a small number of companies. In contrast, the share prices of many earlier stage, pre-profit tech companies struggled as speculative excess, a hallmark of markets in the latter part of 2020 and early this year, unwound.
The UK too had its fair share of winners from the great reopening – economically sensitive areas such as energy, as well as small companies sensitive to the domestic economy regathering momentum. A number of smaller companies funds benefitted.
Chinese equities struggled, though, as authorities moved to clamp down on regulatory concerns and certain business activities. The Chinese government has become more interventionalist towards listed companies, looking closely at issues such as competition, data protection, consumer rights, employee’s rights, and wellbeing. The main corporate victims were in the burgeoning tech sector where businesses have grown very rapidly and, in some cases, with a rather relaxed attitude to sticking to the rules.
Adding to the malaise for investors in the region, the Chinese property sector was also the target of a government crackdown because authorities consider house prices too expensive and a potential source of social unrest. Overindebted property companies including Evergrande, which was the first though surely not the last to default on its debt, were the immediate victims but it has prompted a slowdown across the sector that will likely impact the Chinese economy more widely.
Besides specialist Chinese funds and broader emerging markets fund biased towards the region the other weaker area was Latin America where geopolitical issues and higher interest rates loomed large. Doubts around Argentina’s ability to pay its debt were reignited and, in another case of history repeating itself, the left-leaning Lula emerged as the favourite to reclaim the Brazilian presidency. He is seen as likely to undo some of the economic reforms undertaken by Bolsanaro who has faced mounting anger over his response to the nation’s Covid outbreak.
Gold also struggled, despite inflation surprising on the upside. As we head towards the end of the year the annual US consumer inflation number is 6.8%, the highest level since 1982 and well in excess of practically all economist’s forecasts a year ago. The response from central banks would normally be to ‘tighten’ monetary policy by putting up interest rates, and we have seen a bit of travel in this direction from the narrative of Jerome Powell, chair of the US Federal Reserve. But it’s been complicated by the ongoing spread of the Omicron variant and accompanying social restrictions as well as weakness in US consumer confidence and a possible spill over from the bankruptcies in the Chinese real estate market.
The subdued gold price has therefore been a bit of a mystery as it’s often a go-to asset in times of surprisingly rapid price rises, especially when interest rates are expected to lag them. It is perhaps notable that it coincides with a period where Bitcoin, oft-cited as ‘digital gold’, is seen by some to be becoming more mainstream through the launches of US exchange traded funds that buy exposure to the crypto asset.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for 2021 with only a few days to go:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for 2020: 31/12/2020 to 28/12/2021. Onshore and retail open-ended funds only.
*There are around 3,000 funds on sale in the UK. The Investment Association divides these into nearly 40 ‘sectors’, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
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