Outlook 2022. Blackfort.

Global markets in 2021: A mixed bag

The 2021 was a complicated year for both equities and bonds. While developed equities performed extremely well, with the US markets up around 27% again more leading the peg, on the flip side we had Hang Seng which lost 13%  just to be followed by Brazilian equites which lost around 11%. Overall Emerging markets were down a touch less than 5%.

It was rather difficult to outperform broader indices as most constituents were down while the market was hovering at recorded levels. For instance, 95% of Nasdaq 100 stocks lost value in 2021, while the index reached new records.

Besides the negative impact of COVID-19 we have seen a lot of interest rate hikes in emerging markets being one of the key headwinds for equity markets. A stronger USD was coming on top of that.

In the second half of 2021 we have seen more tension from the west towards Russia and China. While in China the weak performance was mainly driven by stronger regulation of various sectors, the Russian equity markets lost almost half of its gains during H2. However, with a very low Shiller PE ratio and a high dividend yield, we would argue that from a valuation standpoint Russia looks attractive. From the BRICS countries probably, only India looks more appealing, given its growth potential and especially given that they do not have a higher inflation rate than government bond yields. We do expect therefore inflow into the Indian market over the coming months.

The development of global corporate bond markets reflects the development of the global equity markets. Asian high yield bonds lost around 12% in 2021, the major part came from Chinese property corporates.

Surprisingly resilient was the reaction of global high yield bonds. We did not see any significant spread widening and US and European corporates returned the coupons.

High quality bonds like European corporates lost value during 2021. European investment grade bonds lost only around 0.5% while their US pendants lost 1.6%. The weak performance of this asset class was expected.

When we turn to US government bonds which lost 2.3%, we must repeat our warning that this asset class will continue to perform poorly. If you consider US inflation with 6.8% your loss of purchasing power in 2021 was almost 9%.

Government bonds in EUR, GBP, JPY or CHF have even a less compelling starting point as all these bonds are negative yielding and they all face high inflation pressures as well.

 

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