As investors near the end of a turbulent 2021, we reflect on the year that gave some earnings surprises, and we take a look at the prospects for financial markets next year.

Our full-year expectation of a relatively constructive outlook for broader equity markets were certainly met, with the majority of global indices displaying impressive returns during 2021. 

The robust level of returns in 2021 can largely be ascribed to the unprecedented fiscal and monetary response taken by global authorities, amid the outbreak of Covid-19 and the subsequent easing of lockdown restrictions, as the global vaccination rollout made significant headway. According to Our World in Data, 43.6% of the world’s population were fully vaccinated as of 30 November 2021. While there are concerns over Omicron having a higher transmission rate relative to other strains of Covid-19, evidence suggests its milder in severity when compared to other variants. 

Winners

Throughout the course of the year, we saw relatively ubiquitous positive earnings surprises across regions which was the primary driver of total returns – particularly in the United States (US). Energy and financial sectors were among some of the main beneficiaries in 2021, as both growth and inflation rebounded strongly. Price pressures, in particular, have certainly been underestimated in 2021. In fact, in the month of November, US inflation registered a print of 6.8% year-on-year, the highest reading since June 1982. Supply chain disruptions, elevated housing costs and a strong rebound in energy prices meaningfully contributed to inflationary pressures in 2021.   

After the most accommodative monetary policy stance on record, the US Federal Reserve recently opted to increase the pace of tapering, as asset purchases will now be reduced by US$30 billion per month. Additionally, the Federal Open Market Committee lifted their median federal funds rate projections throughout the forecast period. Notably, this now includes a scenario of three rate hikes in 2022 and an additional three rate hikes in 2023 in increments of 25 basis points to stem inflationary pressures. More recently, however, we have seen a broad-based deceleration in commodity prices, which should lend support to a disinflationary backdrop as we progress into the new year. However, elevated natural gas prices in the European region and in the United Kingdom amid low inventory levels poses a real threat to corporate margins if sustained at these higher prices.    

Losers

It is worth noting that China was one of the few markets to underperform the global economy in 2021 and among one of the worst in the emerging market basket. The emergence of lower growth and rising inflation, particularly in producer prices, quelled support for the Chinese equity market. In addition, haphazard regulatory pronouncements in the technology sector and defaults from debt-ridden real-estate developers such as Evergrande sparked jitters among investors. For majority of the year, the Chinese credit impulse accelerated to the downside, troughing at a decline of 8.8% year-on-year in October, underpinning the difficult year in the world’s second largest economy. While the most recent data has illustrated a less negative downturn in the credit impulse and monetary policy has indeed become more supportive, for now, we remain relatively cautious on China. Our expectation is for improved credit conditions, however, which combined with low market multiples could see us become more constructive during 2022.

Global Government Bonds offered little in terms of diversification benefits in 2021, as yield curves steepened in a synchronised manner, and as higher growth and inflation prospects began to be priced into yields. This resulted in a capital loss in the bond market – particularly in the first half of the year. However, in the corresponding period, high yield Bonds displayed much better returns as the probability of default embedded in these fixed income securities compressed. High yield Bonds are also less sensitive to changes in risk-free rates. 

The year ahead

Heading into 2022 we are cautious on the returns for global equity markets, as many of the catalysts that propelled equities in 2021 will likely fade. Supportive monetary and fiscal policy, particularly in the US will likely dissipate. It will be important to remain on high alert once global liquidity is drained from financials markets. For now, the developed market consumer income statement and balance sheet position stand in good stead, although we expect precautionary savings to fully unwind in the near-term, unless further lockdown restrictions are erected. Price pressures from supply chain bottlenecks will likely begin to unwind in the new year as trading conditions normalise. In addition, shelter price base effects from 2021 will likely lead to a disinflationary backdrop as a more meaningful acceleration seems unlikely, as rising affordability concerns may limit house and rental price appreciation.  

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