Economic resilience combined with strong corporate earnings helped the developed market equities finish the final quarter of 2021 on a strong footing.
The emergence of highly transmissible coronavirus Omicron variant caused a sharp spike in volatility towards the end of November but markets recovered quickly as some of the initial fears about Omicron were alleviated following data from South Africa and the UK indicating relatively mild infection risk.
The Bank of England (BoE) was the first major central bank to raise interest rates to fight rampant inflation. The U.S. Federal Reserve (Fed) has also announced its planned wind-down of bond purchases at a faster pace than previously anticipated with possible three interest rate hikes in 2022.
The fixed income sector, (developed government bonds in particular) were negatively impacted by the central bank actions with UK gilts, U.S. treasuries and German bunds all drifting back in December as yields rose.
Despite a sharp decline in the price of natural gas, the commodities also posted moderately positive returns in the fourth quarter, with industrial metals being the best performing component.
Pleasingly, the domestic equities are back in favour and finished the quarter strongly following a
sell-off in late November with a number of defensive areas doing particularly well.
The U.S. equity markets also advanced over the quarter, led by technology and real estate sector.
Taking a cue from the UK and U.S. equities, the European markets ended the quarter in positive territory on the hopes of a low probability of further restrictions to fight Omicron given the reduced hospitalisation rates. Utilities and technology performed particularly well during the quarter.
The Asian equity markets were also up for the quarter albeit with muted gains, weighed down by China which was one of the worst performing markets for the second consecutive month and also for the year 2021.
Looking ahead, we expect high dispersion across sectors in 2022, which means stock selection is going to play a key role in generating superior returns. We also do not rule out the possibility of a policy error by the central banks, a classic catch-22 scenario where raising rates too aggressively to curb inflation might prove counterproductive, derailing the post-covid economic recovery. On the other hand, with inflation surging, wages rising and unemployment falling, waiting too long to raise rates could also put the economy at risk.
In a nutshell, we expect 2022 to be a bumpier ride with moderating corporate earnings, fading monetary and fiscal support and heightened volatility.
As always, from all of us here at Montage, stay safe and we will hopefully see you very soon.