Q4 2021 Market Review

31 December 2021

Overall it was a positive period, providing investors with the third calendar year in a row of strong positive returns.  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 and the UK indicated a lower risk of severe disease. 


Within credit markets, Index Linked Gilts were the main beneficiaries of the continued pickup in inflation with the FTSE Index Linked Gilt Index gaining +4.9% over the reporting period, outperforming the FTSE UK Conventional Gilts Index which gained +2.4%.  Sovereign debt outperformed corporate credit due to concern over the effect rising Covid infections might have on corporate activity, with the iBoxx Sterling Corporates Index adding just +0.4%.  Within equity markets, returns were somewhat polarised with developed outperforming emerging markets.  In the UK, the FTSE All Share gained +4.2%, with the more international FTSE 100 Index adding +4.7%, outperforming the more domestic FTSE 250 Index which advanced +2.4%.  Overseas, in other Western developed markets, the S&P 500 Index was again the strongest performer, gaining +10.5%, whilst the FTSE Eurofirst Index added +5.5%.  Overall, the FTSE World ex-UK gained +7.0%.  Elsewhere, in Asia, the MSCI Asia Pacific ex-Japan Index lost -0.6%, whilst the MSCI Emerging Markets Index lost -1.7%.


Among the major Western economies, the extent of restrictions imposed so far has varied with the number of hospitalisations.  Working from home restrictions have been implemented across much of Northern Europe whilst here in the UK booster jabs are now being rolled out at a much faster rate and do seem to be doing a good job at limiting hospitalisations.


Inflation has remained a key discussion point throughout the period with the US Consumer Price Index jumping to +6.8% year on year in November, its highest reading in 31 years.  Financial markets globally remain very aware of the potential for tighter monetary policy.  Furthermore, Jerome Powell, who has been fairly vocal in recent months about speeding up the pace of tapering, was reappointed as Federal Reserve Chairman.  Elsewhere in the US, President Biden signed a long-awaited Bipartisan Infrastructure Bill in order to upgrade America’s roads, bridges and railways and deploy electric charging stations across the country.  This all provided some support for US markets.


In Europe, economic data was mixed.  On the positive side, the PMI data rebounded strongly after three consecutive months of decline.  That said, there were some diverging trends with the French economy looking stronger than the German economy although much of this can be explained by the 4th Covid wave which has been more acute in Germany than in France.  Furthermore, several countries, as mentioned previously, have already reintroduced new restrictions to curb the spread of the virus.  These measures, together with inflation reaching +4.1% in October have weighed on consumer sentiment.


In the UK economic momentum has remained relatively strong but the new measures to curb the spread Omicron may well have a negative effect on consumer confidence and retail sales.  The UK Consumer Price Index rose to +5.1% and the unemployment rate dropped to 4.2%.  Labour market data has continued to strengthen which is positive but labour market tightness could further fuel inflation.  The Bank of England reacted by raising interest rates by 0.15% to 0.25%, despite the rapid spread of Omicron.


In Asia and the emerging markets the macro economic data for China showed an improvement in both external demand and domestic activity.  Chinese exports continue to grow and surprise to the upside driven by strong demand from Europe.  On the domestic front, retail sales are ahead of expectations and ‘singles day’, the Chinese equivalent to our Black Friday, generated record sales.  The consumer sentiment and the economic backdrop in the region certainly seems to be improving after a difficult period.


All in all this was a fairly tricky period with investors having to deal with a number of changing market dynamics.  Inflation, monetary policy, conflicting economic data and the outbreak of a new Covid variant created a certain amount of volatility within all financial markets.  With the outlook remaining uncertain, volatility is likely to remain a prevalent theme in the near term.

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