Global Market Overview
2021 was another strong year for the global stock market, driven by robust economic activity, accommodative fiscal and monetary stimulus, as well as strong corporate earnings. Developed market equities continued to rally over the fourth quarter, providing investors with the third consecutive year of positive returns. Fixed income performance over the quarter was flat, as markets digested rising inflation and tightening policy from central banks. The emergence of the highly infectious Omicron variant led to a spike in equity market volatility at the end of November, but markets quickly recovered as data from South Africa indicated a lower risk of severe disease. The pandemic and subsequent policy responses have had a profound impact on demand, supply and labour, which have resulted in inflation unlike anything central bankers have been able to achieve for decades. In December, three of the four major developed market central banks indicated that they have greater concerns about inflation heading into 2022, than about the economic disruption that could be caused by the Omicron variant.
The S&P 500 advanced +4.4% in December and closed the year +26.9% higher, while the Nasdaq rose +0.7% MoM and +21.4% YoY. The UK’s FTSE 100 ended the month +4.6% higher to conclude the year +14.3%. France’s CAC Index soared +28.9% in 2021 (+6.4% MoM), while Germany’s DAX ended the year with a +15.8% gain (+5.2% MoM). Chinese equities were weighed down by a slowing manufacturing sector, debt crisis in the country’s property market and restrictive regulatory environment. Hong Kong’s Hang Seng Index was down -0.3% MoM and fell -14.1% YoY. The long-term growth and investment outlook for China still looks compelling, particularly after the sharp price-to earnings (P/E) ratio contraction of the past year.
In the United States, President Biden signed a long awaited $1.2 trillion bipartisan infrastructure bill. The bill includes $550 billion of additional spending to upgrade America’s transportation, water and power infrastructure, as well as broadband. The November US Consumer Price Index (CPI) jumped to 6.8% (YoY), its highest reading in 40 years. The rapidly tightening labour market and persistent inflationary pressures pushed the Federal Reserve to adopt a more hawkish stance.
It announced plans to accelerate the tapering of asset purchases from $15 billion to $30 billion per month, beginning in January 2022. This suggests the tapering should be concluded by March 2022, paving the way for additional rate hikes, with the consensus forecast standing at three hikes in 2022. But strong performance of financial assets and real estate have pushed the ratio of US household liabilities to assets to its lowest reading since 1973. This, along with elevated household savings, give consumers significant firepower in the coming years.
Energy prices rose faster than other commodities in 2021, as the global economy reopened and inflation surged. Brent crude oil gained +50.2% YTD (+10.2% MoM) higher. As investors opted for assets which carry yield in a rising interest rate environment, precious metals underperformed and gold lost -3.6% YTD.
South Africa’s FTSE JSE All Share Index rose +4.6% in December, ending the year with a +24.1% gain. The rand lost ground against the US dollar (-0.4% MoM) and gave up -8.5% YoY. The November annual headline inflation, as measured by the consumer price index (CPI), accelerated to its highest level in four years, coming in at 5.5% YoY. After recording four consecutive quarters of growth, SA’s real gross domestic product (GDP) slumped -1.5% quarter-on-quarter, exacerbated by July’s civil unrest and renewed loadshedding, eroding some of the economic gains the country has made since the severe impact of COVID-19 lockdown restrictions.
On the pandemic front, the country appeared to have passed the peak of the fourth wave of infections. The curfew that was in place from 00h00 to 04h00 was lifted with immediate effect resulting in no remaining restrictions on people’s hours of movement. Indoor and outdoor gathering restrictions were eased and establishments selling alcohol with a licence to operate beyond 23h00 reverted to their full licence conditions.
Message from John
Due to the spread of Omicron, the first quarter of 2022 could be challenging for the global economy. Continued pandemic-related restrictions could coincide with disappointing economic data. So far, the market has largely been willing to look through the near-term risks, but any further disap-pointment on the virus front could lead to increased market volatility.
The Iza Portfolios
With the exception of Scottish Mortgage Investment Trust, all other underlying funds in both the Iza Global Balanced and Equity Funds delivered a positive return contribution for December. The extent of Scottish Mortgage’s decline for the month (-10% MoM; +10.4% YTD) however, led to negative returns for both funds over the period. The Iza Global Equity Fund eased -1.9% MoM, but advanced by +10.6% YTD (GBP returns). The Iza Global Balanced Fund declined by -0.8% MoM and is up by +9.4% YTD (GBP returns), while the Stable Model Portfolio closed -0.4% MoM and +4.3% YTD (GBP returns).
Scottish Mortgage’s decline for the month is attributable to the performance of its top ten holdings, more specifically that of Moderna (-28% MoM), Tesla (-7.7% MoM), Ginkgo Bioworks (-30% MoM), NIO (-19% MoM), Alibaba (-6.9% MoM) and Nvidia (-10% MoM). The investment trust has been known to be volatile due to its individual stock and sectoral selection.
This volatility caused downward pressure during December, but it is this exact same volatility and assertive investment profile that also frequently lead to months of strong outperformance. Coming into 2022, the dip in Scottish Mortgage afforded us an attractive buying opportunity and we purchased additional units at depressed price levels for the Iza Fund range.
Investors will have to remain sufficiently diversified to ensure their portfolios are generating the returns they require. Inflation is at 40-year highs and COVID-19 remains a near-term risk. So far, Omicron is showing greater transmission levels, but symptoms are milder, as evidenced by daily cases, hospitalisations, and death rates. If, over the next year, the hit from Omicron is short-lived, the prospect of another year with above-trend GDP growth and rising corporate earnings still justify an overweight position to equity risk in portfolios.