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January 1st, 2022

Hedley Market Commentary - January 2022

Hedley Market Commentary - January 2022

Despite an abundance of negative news, global equity markets produced some fairly healthy returns in 2021. UK equities gained around 14% over the year and, in sterling terms, European markets averaged 17% while Japan was flat and emerging markets made some reasonable progress.

The standout performer was the US where the S&P 500 returned 30% although this was hugely influenced by only 5 mega cap stocks such as Alphabet, Tesla and Microsoft which produced such stunning gains that the major indices were flattered by their performances.

The bond markets fared less well over the year with UK gilts falling 6% on average but index linked gilts returned a positive 4% as inflationary trends took hold. The covid pandemic once again took centre stage in 2021 and while financial markets absorbed the news flow reasonably well the announcement of the new strain towards the year end momentarily proved a little unsettling.

However, while markets appear to have accepted that Covid is likely to be with us for some time to come, they are certainly not complacent about how this might develop in future with its continued economic fallout. The pandemic and its financial consequences are likely to continue to influence markets in 2022. One of the financial effects of the pandemic was the sudden outbreak of inflation. As economies began to reopen in the summer there was a surge in consumer demand to the extent that shortages of products and services began to emerge; this was exacerbated by some important global economies remaining closed, creating supply chain problems and lack of resources. Although many central banks proclaimed that inflation was only transitory and would soon lift as the economic process settled down, this now seems unlikely as the stuttering nature of normalisation will probably take years rather than months as the slow global rollout of vaccines and potential new strains take their toll. With the sharp rise in inflation comes the challenge of what action may be required to curb the increase and what impact, if any, this may ultimately have.

So far, we have seen the Federal Reserve Bank substantially reduce its Quantitative Easing programme, which is in place to hold interest rates at low levels. The next stage is a series of interest rate rises in 2022 which is meant to slow down the economic impetus and therefore, inflation. We have seen similar action by the Bank of England which has recently begun to increase interest rates. The difficulty will be whether this sort of move will work as the major problem seems to be global rather than domestic and whether such action could slow the domestic growth to the extent of creating a recession and stagflation.

Central banks are certainly extremely wary about moving too quickly, especially with the pandemic still causing huge economic uncertainty; however, some monetary tightening needs to be undertaken in order to retain market credibility. In many ways, stock market returns were extraordinary in 2021 with gains being made in the face of great uncertainty, much of which is still to be resolved. The interest rate tightening cycles and high level of inflation could put further pressure on equity and bond markets in 2022, as could equity valuation levels especially in the US which are at all time relative highs versus the rest of the world. The bond markets look especially vulnerable with their still very low yields, stubbornly high levels of inflation and with rising interest rates it is difficult to see how gains can be made. However, apart from the US, there is still potential upside in UK, European and especially some emerging market equities which have made more limited gains and where valuation metrics still look reasonable; there is still much to merit investment here especially for those prepared to take a longer term view on continued global recovery.

This market commentary is not intended to provide information sufficient to make an investment decision.

All opinions contained in this report constitute Hedley & Company Stockbrokers Limited Management’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility.

Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

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