Performance – December 2021


Performance – December 2021

We ended the investment year 2021 with yet another terrific month for those of our portfolios that contain primarily equities and secondarily high-yield bonds.
Following a weak start to December, we saw our long-awaited ‘Christmas rally’ - and the global equity markets (for instance EM equities) rose by 4.2% over the period from the 20 to 30 December. Hence 2021 ended with a return in the global developed equity markets of more than 30%!

Yet at the beginning of the month there were plenty of worries to be considered. The new Omicron variant and indications from the Fed that it might taper its bond purchases were two of the most important ones. Even though Omicron is a very dominant theme, indeed, all over the world, the financial markets react in a positive way to the prospects of a less severe course of disease and the continued roll-out of vaccines, which will reduce the risk of an extensive lockdown of the economies.

Also, at the end of December, the prospects of fewer stimuli from the Fed did not give rise to major concerns in the market. The continued high growth level (even though it is on the decline) could easily tolerate the slightly higher interest rates, as it is still assessed that the monetary policy will support the economy. This conclusion was questioned slightly here at the beginning of 2022, where the markets are currently reacting negatively to new comments from the Fed about tapering the bond holding on its balance sheet. This resulted in decent yield increases in both the short and the long end of the market (see figure 1). It will obviously be a theme for the entire year 2022 whether the central banks globally (and especially in the US) will manage to raise the interest-rate level without rocking the boat too much in especially the equity and credit markets.

Figure 1: 10-year yields

Asset class performance

As stated above, December was yet another good month, especially for equities in the developed economies (return of 3.2%). On the whole these markets rose by a total of 30.9% in 2021, which is, indeed, an extraordinarily high return. Again the emerging equity markets had problems following suit, and given the increase of 0.8%, investors had to ‘make do’ with an increase of 4.8% for the full year 2021. Also high-yield bonds saw a very good month, but again returns on the emerging markets are lagging behind compared to corporate bonds in the developed countries. The rising yields affect traditional bonds, which ended 2021 with negative returns.

Right now

We still have a positive view of the equity market here at the beginning of 2022. The reason is that the probability of a major economic downturn (recession) is low, and that the alternative to equities is still offering very low expected returns. However, 2022 will probably be a year offering more ‘normal’ fluctuations in the market than what we enjoyed in both the second half of 2020 and the full year 2021.