Fairview Investment Update – Jan 2022

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As we begin a new year, we look back at what happened with investment markets and funds in 2021 and what the investment backdrop looks like going into 2022.

Looking back at 2021 …

2021 has been about how the World has emerged from and learned to live with Covid. The investment backdrop has been characterised by strong levels of economic growth fuelled by monetary and fiscal stimulus and the pent-up demand as economies reopened throughout the year.

Although the year ended with a ‘tidal wave’ of Omicron reminding us that the Covid pandemic is not yet beaten, we have travelled a long way in 12 months. Efficacy and speed with which vaccines have been rolled out has been a game changer and the economic impact of each Covid wave has diminished over time as businesses have adapted. Investors are also more discerning and whilst sectors such as travel & leisure remain highly sensitive, the broader economic and investment backdrop is much more resilient.

Market watch

As economic activity has normalised, 2021 has been an exceptional year for risk assets and most global stockmarkets posted healthy gains. The MSCI World Index posted a strong return of 24.5% over the year. Once again it has been driven by the exceptional performance of the US stockmarket and the S&P 500 was the standout developed market rising 28.1% as technology shares have continued to reach new heights.

Yet most western developed markets have had a good year. European stockmarket returns have been strong, with the MSCI Europe Ex UK index up by 23.6%. And it has been a better year for those investors who have kept faith in UK shares. The FTSE 100 posting a total return of 18.4%, whilst smaller companies have benefited from a high level of takeover activity and the Numis UK Smaller Companies index returned 21.8% in 2021.

In contrast Asia and many emerging markets have struggled. Japan lagged other developed markets but did still generate a double-digit return (TOPIX was up 12.4%). However, China has had a torrid time with a sell-off in their leading technology companies, fears over regulation and the Evergrande crisis resulting in a fall of -23.1% in the MSCI China Index. This weighed heavily on Asian and Emerging market benchmarks and both fell marginally in 2021; with low vaccination rates compounding the effect of Covid. One success story in emerging markets was India which had a stellar year with MSCI India gaining 28.4%. It is easy to forget how badly the covid crisis hit India in the Spring, yet now over 800 million doses of vaccine have been administered.

From a style perspective, 2021 was a much-improved year for value investing after a sustained period of underperformance, boosted by the strong economic recovery. However, growth sectors such as technology remained strong. In terms of the benchmark MSCI World Value and Growth indices there has been little to choose with returns of 24.2% and 24.3%.

Government bonds have had a difficult year, with yields rising and prices falling as economic conditions improved and inflationary concerns increased. At the start of 2021, the 10-year gilt yielded 0.16%, and today they are back at pre-pandemic levels at 0.96%. A similar story is seen in the US where the ten-year Treasury finished 2021 yielding 1.5%, having started the year offering 0.84%. Such movements translated into a negative total return of -4.9% for the Bloomberg Global Aggregate Bond index.

Gold lost its shine in 2021 as investors traded out of safe havens as the economic environment improved. The price has fallen close to 4%, from $1898 an ounce at the start of 2021 to $1828 and it has not provided the inflationary hedge it is often cited to offer.

Finally in the currency markets the dollar rallied strongly and was the best performing major currency. The pound was down 1% against the US dollar, but up 6% against the Euro and 9% against the Yen.

Fund Watch

In one of those interesting twists, energy funds were some of the best performers in 2021 having been some of the worst funds of 2020. Schroder Global Energy (+48.8%) was a case in point and took top spot last year on the back of surging oil and gas prices and a big uptick in demand.

India was probably the surprise package of last year and was the best sector in the open-ended world, IA India up by 28.3%, narrowly beating the US, commodities, UK small cap and interestingly the Property Other sector. Maybe the latter isn’t so surprising after all as workers returned to offices, consumers returned to shops and property became useful again. It felt more like a rebound from 2020 rather than sustained growth though.

The Latin American sector (-11.4%) was the worst performing last year closely followed by China (-10.7%). The next 13 worst performing sectors were all fixed interest – it’s hard to deliver positive performance in the face of the rising bond yields witnessed in 2021.

In the trust world Property UK Logistics and Private Equity slugged it out for top spot with Property narrowly winning the race.

 Looking ahead to 2022

Although on the face of it the inflationary concerns and rising interest environment could be concerning, there are good reasons why many fund managers we speak to believe that the backdrop remains supportive for investors.

Although growth levels will likely be more subdued after the sharp bounce back in 2021, the economic recovery is forecast to continue, with consensus forecasts predicting above trend economic growth in 2022. The latest forecast from the IMF is that the global economy is projected to grow at a healthy 4.9% in 2022 (versus the expected 5.9% for 2021).

Household balance sheets are strong which will support consumption and business spending is also expected to be robust with increased cash on corporate balance sheets. Although these projections were made before Omicron took hold, the latest wave is likely to delay but not destroy consumer and business spending. This environment is likely to be supportive for corporate earnings and high single digit growth is widely touted, with some commentators believing this to be conservative.

Inflation undoubtedly remains a concern and the latest UK CPI reading of 5.1% is the highest for a decade. We are likely to see significant fluctuations in headline inflation throughout the year; the Bank of England forecasts UK inflation will peak in April at 6%. Many inflationary forces such as fuel prices and supply chain pressures appear to have been largely transitory and should begin to moderate in the coming months. However, the lack of supply in many areas of the labour market may make wage growth more of a structural issue. Inflation is likely to remain above the 1-2% we have become accustomed to, but if it begins to moderate from the recent spike this should not be overly concerning for investors.

We are in an environment of rising interest rates, it is simply a question of by how much and how quickly. The Bank of England has been first to move and the US Federal Reserve has signaled three interest rate rises in 2022. Interestingly stockmarkets have been sanguine in both cases. In Europe the Central bank has indicated no interest rate rises. 

2022 will see Central banks walk a tightrope between stopping inflation overheating but avoiding aggressive interest rate rises that could derail economic growth. Central bank activity will be closely watched by investors with moderate rises are already priced in. If the Central bank activity follows guidance this should be positive for stockmarkets and despite the inflationary spike the expectations of a lower for longer interest rate environment remain. Bond markets see little scope for US rates above 2% or UK rates going above 1% in the next decade.

‘TINA’ also remains a valid argument that will support markets. The acronym represents that There Is No Alternative to equities amongst traditional asset classes that have potential to generate a real return going into 2022. Bonds and cash both yield significantly below the rate of inflation, so this will force investors to favour risk assets if they want to protect their portfolio from inflation.

It is important not to be complacent given the strong recovery already seen, and volatility levels may well be higher than we have seen in 2021. But unless we get an economic shock it feels that there are still some compelling investment opportunities to explore in 2022.

Important Information

This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.

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