December Investment Summary
December began as November had ended with concerns over the new Omicron variant and how it would slow growth and exacerbate supply chain issues. The markets wrestled with how governments would respond, and how central banks would deal with persistently high levels of inflation that showed no signs of being transitory. In fact, the developed world experienced its highest levels of inflation in decades with the UK at 5.1%, US at 6.8%, the Eurozone at 4.9 %, with Germany in particular experiencing 5.2% for the year.
Despite these worries, equity markets rallied higher mid-December and closed 2021 strongly as the early evidence was that the new variant, whilst highly contagious, was less severe than earlier variants. In sterling terms, the Dow was up nearly 4% and the S&P 500 up just under 3% while the NASDAQ fell 0.6% for the month. In Europe, the story was similar with the Euro Stoxx 50 up over 4% and the FTSE 100 up just over 4.5%. Even Asian markets, which have struggled all year, managed to eke out small gains as the Nikkei 225 rose 0.4% and the Shanghai index was up over 1%.
For the full year, US indices were the place to be as the S&P 500 led the way with a 28.5% return in sterling terms, closely followed by the tech heavy NASDAQ up over 23% for the year. European and UK indices returned low teens while Asian markets struggled. The Nikkei 225 and the Hang Seng indices were both down on the year in sterling terms, while the Shanghai composite rose over 9%.
The same three issues we have discussed for much of the year (the pandemic, inflation and central banks response to inflation) continued to influence the direction of financial markets. Both the Federal Reserve and the Bank of England admitted that inflation was perhaps not as transitory as they had been thinking and that a change in policy was warranted.
The Federal Reserve announced they would rapidly reduce their pace of asset purchases, so that as of end of March of 2022 they would no longer be buying any US treasuries or mortgage-backed securities. They also forecast they would hike interest rates three times in 2022. The Bank of England chose to hike rates by 15 basis points and suggested they might hike rates a further three or four times in 2022. It is doubtful any of these actions will make a significant difference to inflation in the near term. Indeed, should inflation remain around current levels then central banks may be forced to act more boldly.
Financial markets may even take matters into their own hands if the central banks are viewed as too soft on inflation. Financial markets responded by pushing bond yields higher, particularly in the front part of the yield curve. More concerning or perhaps more damaging to investor psychology (and their wealth) has been the sharp sell-off in a variety of the more speculative tech names. This sell-off will likely persist until fixed income markets calm down.
While we doubt that the Federal Reserve or the Bank of England will hike more than they have currently forecast, it is not clear how fixed income markets will handle the sudden disappearance of their largest single buyer of duration. Since the advent of the pandemic in 2020, the Federal Reserve has purchased over $1.75 trillion in US treasuries. This has absorbed a huge chunk of the US government’s enormous deficit over that period. They also purchased another $800 billion+ in mortgage backed securities, taking additional duration out of the markets. The absence of this bond buying programme is likely to have an adverse effect on fixed income markets.
Turning to Covid-19, early data regarding the Omicron variant appears to show that the worst of the pandemic’s impact is waning. The new variant, while spreading more rapidly than was ever anticipated, is not bringing with it massive hospitalisations and deaths. Vaccines are working to limit critical illness and governments appear to be shifting to a stance where we learn to live with the virus rather than shut down activity in order to halt its spread.
China, in sharp contrast to the US and Europe, has not come to this conclusion and has locked down huge swathes of its economy in an attempt to eradicate the virus. These lockdowns will likely have an impact on global supply chains, resulting in continuing supply chain dislocations, shortages and price increases for many goods. It is not all bad news in China as they have been modestly easing monetary policy to mitigate the ongoing slowdown in their housing and property markets. We expect the People’s
Bank of China to continue to provide support, which should prevent a broad systematic financial collapse. That said, Chinese growth will continue to slow, and the world will notice.
Looking forward, we continue to favour equities with a preference for companies with earnings and pricing power. We recommend avoiding large holdings in “disruptive” firms with no earnings. Short duration within fixed income is still preferred, although any overshoot by financial markets may offer some opportunities later this year. Finally, watch out for central banks’ attempt to remove accommodation as this will likely result in a period of heightened volatility for financial markets.
This document was produced by Oakbridge for information purposes only and for the sole use of the recipient. Any information provided by a client ("Client Information") and used to produce this document will have been checked by Oakbridge for plausibility only and the client notified accordingly of any obvious anomalies. However, Oakbridge has not checked the Client Information in detail for completeness and accuracy and accepts no responsibility whatsoever in respect of the Client Information. The Client makes all investment decisions independently. Past performance, simulations and forecasts are not necessarily a reliable indication of future performance and the value of investments may fall as well as rise. The information contained in this document is only valid at the time this document is produced. A change in the economic environment, possible changes in the law and other events may cause future performance to deviate from that expressed or implied in this document. The information and analyses contained in this document have been gathered from sources that are generally considered to be reliable. However, Oakbridge makes no representation as to their accuracy or completeness in relation to the investment products described and does not accept liability for any direct or consequential losses arising from reliance on the information contained in this document. An Oakbridge Group company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the investment products referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. Alternative investments, derivatives or structured products are complex instruments that typically involve a high degree of risk, and are intended for sale only to investors who are capable of understanding and assuming the risks involved. Investments in emerging markets are speculative and significantly more volatile than investments in traditional markets. Some of the main risks are of a political, economic, currency or market-related nature. Furthermore, investments in foreign currencies are subject to exchange rate fluctuations. Investments in the investment products described in this document should be made only after carefully studying and reviewing the product documentation. The opportunities and risks associated with each investment product can be found in the relevant underlying securities prospectus and any other supplementary documents. All documents will be made available at any time upon request. Oakbridge does not provide tax or legal advice and, before entering into any transaction, investors should independently consider the financial risks as well as the legal, tax, credit and accounting consequences of that transaction. The attached material is not the result of our/a financial analysis. Neither this document nor any copy may be further distributed to any party. In particular, it may not be sent, taken into or distributed in the United States or given to any US person. This restriction applies equally to other jurisdictions, unless such actions are performed in compliance with the applicable laws of such jurisdiction. This communication is confidential and intended solely for the person to whom it is delivered. No part of this communication may be reproduced in any form or by any means or re-distributed without the prior written consent of Oakbridge. This communication should not be construed as an offer to sell any investment or service. This communication does not constitute the solicitation of an offer to purchase or subscribe for any investment or service in any jurisdiction where, or from any person in respect of whom, such a solicitat ion of an offer is unlawful. If you are in doubt about the securities to which this communication relates, you should consult an independent financial adviser. The information in this communication has been prepared in good faith, however, no representation or warranty, expressed or implied, is or will be made and no responsibility or liability is or will be accepted by Oakbridge or its officers, employees or agents in relation to the accuracy, completeness or fitness for any purpose of this communication. The information stated, opinions expressed and estimates given are subject to change without prior notice.
The services described are provided by Oakbridge or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Certain products and services may not be available in all locations or to all Oakbridge clients.
Oakbridge is regulated in Jersey by the Jersey Financial Services Commission for the conduct of Investment Business.
Oakbridge is a limited company with company number 121454, incorporated in Jersey on 7 June 2016. Its business address is Weighbridge House, 2nd Floor, Liberation Square, St. Helier, Jersey, JE2 3NA.
Oakbridge is a registered business name of Oakbridge Limited.
Oakbridge forms part of the ED Group.