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News – 10.04.24
Form PF: Are you up to speed with the latest developments?
Through this insight we will bring to your attention the main changes in a bitesize manner so that you can stay abreast of the requirements as they may apply to your firm. … Read more
Insight – 16.04.24
US and UK tax on carried interest
US and UK tax on carried interest … Read more
Upcoming event – 29.04.24
Governance code updates and advice for Further Education colleges from Buzzacott and the ESFA
Join Buzzacott and the ESFA for a governance update for further education colleges … Read more
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Perhaps surprisingly given some of the global challenges and widespread views in 2020 that some markets may already have been overvalued, 2021 saw strong, and relatively stable, equity market growth. Encouraging economic growth in developed markets supported particularly strong earnings, and despite some tightening, with the continuing liquidity provided by what was overall still loose monetary policy, markets surged on. With a brief exception on the news of the outbreak of the Omicron variant, markets largely shrugged off COVID-19 related fears throughout the year.
Once again, the US led the way, with new highs and the S&P 500 Index ending the year up 29.89% in sterling terms. UK and European equity markets also performed well, although Japanese markets struggled in comparison with key industrial sectors hit hard by global supply-chain shortages and consumer spending taking time to recover to pre-pandemic levels.
Emerging markets didn’t have a good year. The Chinese economy, which has proven to be a key driver for emerging markets over the past two decades, proved a hindrance to returns. Unexpected mid-year Chinese regulatory action to crack down on tech enterprises, private education firms and overseas listings, as well as a slowdown in their economic growth, the financing challenges faced by their property developers, their comparatively early tightening of monetary policy, and generally lower rates of high-efficacy vaccinations in emerging markets, compounded problems for the region.
Figure 1 shows the performance of £10,000 invested in selected equity markets over the course of the year.
Source: Morningstar Advisor Workstation
The dispersion between these global equity markets highlights how challenging it can be to predict which will outperform at any given time. The year was therefore again one that demonstrated the benefits of a diversified approach with access to all global markets.
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Perhaps surprisingly given some of the global challenges and widespread views in 2020 that some markets may already have been overvalued, 2021 saw strong, and relatively stable, equity market growth. Encouraging economic growth in developed markets supported particularly strong earnings, and despite some tightening, with the continuing liquidity provided by what was overall still loose monetary policy, markets surged on. With a brief exception on the news of the outbreak of the Omicron variant, markets largely shrugged off COVID-19 related fears throughout the year.
Once again, the US led the way, with new highs and the S&P 500 Index ending the year up 29.89% in sterling terms. UK and European equity markets also performed well, although Japanese markets struggled in comparison with key industrial sectors hit hard by global supply-chain shortages and consumer spending taking time to recover to pre-pandemic levels.
Emerging markets didn’t have a good year. The Chinese economy, which has proven to be a key driver for emerging markets over the past two decades, proved a hindrance to returns. Unexpected mid-year Chinese regulatory action to crack down on tech enterprises, private education firms and overseas listings, as well as a slowdown in their economic growth, the financing challenges faced by their property developers, their comparatively early tightening of monetary policy, and generally lower rates of high-efficacy vaccinations in emerging markets, compounded problems for the region.
Figure 1 shows the performance of £10,000 invested in selected equity markets over the course of the year.
Source: Morningstar Advisor Workstation
The dispersion between these global equity markets highlights how challenging it can be to predict which will outperform at any given time. The year was therefore again one that demonstrated the benefits of a diversified approach with access to all global markets.
2021 provided an interesting landscape for fixed income. At the start of the year, the Bank of England were preparing banks for the possibility of negative interest rates. However, as the year progressed and inflation spiked, it became clear that increases were much more likely. After widening in 2020, credit spreads (the difference in yield between a government bond and a corporate bond of the same maturity) generally narrowed to return to below pre-pandemic levels. This could be seen as an indication of improved confidence in corporates’ recovery from the pandemic and creditworthiness, as investors demand less of a yield from corporate debt, relative to government debt.
The Bloomberg Global Aggregate Bond index returned -3.83% for the year as returns on both government and corporate bonds were lacklustre. With inflation exceeding expectations, most inflation-linked bonds had better results. The Bloomberg World Government Index-Linked 1-10Yr Hedged GBP index return for the year was 5.44%.
Although in comparison to equities, it wasn’t the year for fixed income, and rising inflation has caused some to question their current position in portfolios, they remain a valuable diversifier. Fixed income isn’t expected to be the biggest driver of long term returns but by having a spread of different issuers, types of bond, and maturity, even in the current environment, there can be return opportunities while helping to reduce portfolio risk.
UK commercial property proved a good diversifier for portfolios, with strong returns and relatively low correlation to equity and bond markets. Other assets that had a good year included commodities and, for those who could stomach significant volatility, crypto assets. However, the latter did once again prove why they’re not yet suitable for most investors looking for long term returns. You can read what we had to say on cryptocurrencies in 2021 here. It was also the year when so-called meme stocks made an impact with the now household name, Gamestop, neatly demonstrating the opportunities such stocks have for some but also the significant risks and losses that many can fall foul to.
2021 also saw an increased interest in sustainable solutions. You can read what we had to say on sustainable and ESG investing in 2021 here.
With nuclear talks with Iran in limbo, ongoing tension with China’s views on Taiwan and the South China Sea, and Putin looking to antagonise, the geopolitical landscape for 2022 is one that has potential for a few unnerving moments along the way. Although, with the focus of the Winter Olympics, the desire to stabilise economic growth and Xi Jinping’s expected bid for a third term later in the year, China may not be the largest cause of uncertainty in the short term.
Common views on themes for the year seem to be emerging. Interest rates increases, value over growth, transitory inflation, overvalued US stocks, undervalued UK stocks and overall a positive, albeit likely bumpy year for equities, all make the list. While we don’t take up a contrary position to these, consensus among market participants is rarely reassuring. As we venture into what will hopefully become a post-pandemic world, it’s worth remembering that a diversified approach can provide reassurance for long term returns even with market uncertainty along the way.
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