An update on global financial markets, the factors that affected them in 2021, and what to watch in 2022.
Countries continue to adjust to the increase in Covid-19 cases as the omicron variant spread to become the dominant variant in several countries. While financial markets initially responded negatively to the rapid spread of the variant, risk appetite returned as incoming data suggested the omicron variant could be more transmissible than previous variants but cause less severe disease. Restrictions on movement, as well as travel bans on certain countries, nonetheless put a dampener on service sector activity over the holiday period.
Global equity markets ended the year reaching new highs, despite lower liquidity over the festive season and lingering concerns around the rising case counts of omicron infections.
The MSCI World Index gained 4,3% in December and 7,9% over the last quarter, to bring the returns for 2021 to 22,3%. With significant representation in the global index, US returns were strong and one of the primary drivers. The S&P 500 returned 4,5% in December and +28,7%% over the past 12 months. Although value sectors remained in favour for much of the year, the technology-heavy Nasdaq 100, which largely comprises growth stocks, still gained 27,5% over the year. Emerging markets staged a modest recovery in December, with the MSCI Emerging Markets Index gaining 1,9%. This was, however, not enough to change the fourth-quarter (-1,2%) and 2021 figures (-2,2%) to positive. A meaningful contributor was sizeable losses in the Chinese markets, especially from big technology companies, as ongoing regulatory changes and a challenged and highly leveraged property sector saw the Hang Seng losing 12,3% over the year.
Weaker growth from China and lower demand for certain commodities impacted several other emerging markets.
The energy markets were arguably the biggest beneficiary this year. Brent crude oil settled close to $78 ahead of the OPEC+ meeting in early January, up about 50,2% over the year – and a far cry from the pandemic-stricken lows. Gas prices repeatedly hit new highs over the latter half of the year, while the price moves from the energy crisis also extended to coal prices.
Global sovereign bond markets traded under pressure for much of the year, as bond yields rose alongside concerns of inflationary pressures and by inference higher probability of earlier interest rate hikes. The US 10-year bond yield rose circa 60 bps to 1,5% by year-end. Corporate credit instruments, especially those in the high-yield space, benefited from a search for yield and improved earnings outlook. In US dollar terms the Barclays Global Aggregate Index declined by 4,7% over the year.
If one considers the change in forecasts and market expectations, economic growth for 2021 was better than expected, despite the ongoing travails and impact of the pandemic. In lockstep, however, increased demand, supply chain challenges, and developments in the housing and labour market led to inflation, also surprisingly to the upside. The main challenge for policymakers and investors this year will be to ascertain how much of these pressures will persist for longer and at what pace policymakers need to tighten monetary policy to combat sustained price increases. While many central banks have already started to reduce monetary stimulus, some are now accelerating the withdrawal. In December the US Federal Reserve (Fed) accelerated the pace of tapering of bond purchases, to end in March 2022, and signalled earlier interest rate hikes. The Bank of England hiked interest rates by 25 bps for the first time since the pandemic began. The European Central Bank, however, seems to be content to continue with a more patient and gradual approach overall, continuing with asset purchases for another 10 months and proposing no interest rate hikes for 2022, despite scaling back on bond purchases. While the direction is clear, the pace and scale of policy actions will likely be a major source of market volatility and surprise this year. Time will tell whether the assertiveness of central bankers will also be the catalyst to stymieing the asset price inflation that markets have been enjoying.
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