We would like to give you here a brief overview of the markets and investment performance in 2021, as well as analyze some important trends that will influence the markets in 2022.
Despite the abundance of negative headlines, 2021 proved to be a strong year for equity markets. The recovery that started in April 2020 then spilled over most of 2021, resulting in SMI and Eurostoxx 50 up 24%, S&P500 growing by 29% and Nasdaq 100 by 28%. Bond markets scored worse, as most bond indices with the exception of High Yield ended the year slightly in red. Gold was also down, sliding almost 4% against US dollar.
These results were also reflected in the performance of the portfolios managed by Investart. Our Aggressive strategies earned between 16–19.2% (depending on the age, goal and time horizon of the investor). Balanced strategies were up 8.1–9.5% and Conservative strategies, where Bonds have a bigger weight, were up 5.2–6.5%.
For comparison, the average net performance of CHF-denominated portfolios managed by banks and wealth managers was significantly worse: 11.8% for Aggressive, 7.4% for Balanced and 2.6% for Conservative (source: ARC Research).
Since September 2021, stock markets have grown more uneven and volatile. The successive upward and downward waves have largely neutralized each other, and indices such as the SPI index of Swiss stocks are practically flat compared to the beginning of September. Investor anxiety has been fueled by high inflation (1.5% in Switzerland, 7% in the US), fear of rising interest rates, omicron, geopolitical tensions, the fate of failing Chinese property developers, etc. In particular, concerns about rising rates have driven down the prices of many technology stocks that were trading on high expectations of continued growth. As a result, high-growth themes that enjoyed investor hype, such as those represented by ARK Innovation ETF, have lost some of their attractiveness and value. Other popular themes like Semiconductors are resisting the downward pressure and continue to grow.
As difficult as it is to make forecasts for the new year, we expect equity indices to end the year 2022 in plus. The growth is likely to be single-digit this time, there will be considerable differences between sectors, and the price development path will be far from linear.
Here are some of the reasons why are we still positive on the equity markets:
- Equity valuations are high but not excessive. For example, the forward Price/Earnings ratio for SPI, now at 19.2, is not far off its 10-year average of 17.5. Nasdaq 100, for example, is at 27.8 compared to the 20-year average of 22. Historically, interest rates were considerably higher than now, which justifies higher equity valuations now compared to history. As long as interest rates do not jump, equities should remain relatively stable.
- Inflation is likely to recede, if not for other reasons than at least due to base effect. One of the reasons why prices were up in 2021 is because they were down in 2020. So, for example, if prices remain elevated but stay at the same level as now, there will be no annual inflation in 2022.
The key components of price inflation have been fuel, food and car prices. We expect fuel and food prices to remain high but not to grow further, whereas car prices might even fall as the situation with chip shortage for new cars is slowly being resolved.
In 2021 a large number of people fell out of workforce and has since required higher salaries to go back to work, which drove wage inflation. We think in 2022 there will be fewer people choosing not to work as a lifestyle choice (as most of such people already made this choice in 2021). Combined with weaker equity markets and fewer alternative revenue sources, there will be more willingness to re-join workforce in 2022, which will slow wage inflation.
- Interest rates will rise, but not as fast as many fear. One of the reasons for this is the potentially slowing inflation — see the point above. Another reason is that nowadays considerably more people, especially middle-class people, are invested in equity markets. Equities sink when rates go up too quickly, which cannot go unnoticed by Central Banks.
- Company earnings reporting season has started and might bring positive surprises, considering that analysts have been revising their forecasts down recently.
Certainly, many risks remain, and among those we attach high importance to the economic situation in China. An uncontrolled fall of property developers can trigger a domino effect and spill onto other sectors and on the consumers, causing economic downturn in the world’s second-largest economy. Opacity of the political decisions, official statistics, rising regulatory pressure on the companies and priority shift from the economy towards politics can worsen the situation.
While it is difficult to cover all the points of interest in the format of a blog post, we hope we have managed to provide you with some useful takeaways. The main conclusion for us is that despite the uneven path and difficult events that might await us in 2022, it is important to retain the long-term focus and to stick to the chosen strategy, making regular but not too frequent strategic reviews to it.
