Quarterly market commentary - December 2021

The fourth quarter of 2021 rounded out another year when developed share markets posted strong returns, despite ongoing uncertainties relating to global supply chains, inflation, interest rates and, of course, emerging variants of Covid-19.

However, markets tend to look ahead. As a result, they weren’t distracted by this ‘noise’, and were instead driven much more by supportive economic and financial data such as positive economic growth, low interest rates and good corporate earnings.

 

2021 recap

Following a quite extraordinary year in 2020, which saw the unwelcome arrival of Covid-19, 2021 was a year of transition mixed with hope for a return to normalcy.

Coming out of a volatile 2020, investors sought signals as to which way the global economy was headed. The distribution of vaccines and the easing of lockdowns helped foster an economic rebound, but the emergence of new Covid variants was a constant reminder that we weren’t in a post-Covid world just yet.

Despite these challenges, global gross domestic product grew strongly, completing the transition from recovery to expansion and eventually surpassing its pre-pandemic peak.

At the peak of the crisis in 2020, high unemployment looked set to be a long term issue. However, as the economic recovery progressed in 2021 it was increasingly accompanied by labour shortages, supply chain issues and fears of rising inflation.

Prices increased rapidly in essential areas such as food and energy, and the media was filled with speculation about where inflation would go, what was causing it, how long it might last, and what could, or should, be done in response.

 

Supply chain update

It’s too early to be definitive, but the significant supply chain disruptions in 2021, largely linked to Covid-19-related production constraints and transportation bottlenecks, may have peaked. However, if true, it may still take some time for this to eventually filter through to the prices we pay for many goods and services.

After rising significantly throughout much of 2021, both the Dry Baltic Index (dry bulk freight costs) and in the HARPEX Shipping Index (weekly container shipping rates) showed declines across November and December.

Whilst these rates are still elevated, it is at least a positive sign that supply chain disruptions could be slowly abating and freight-related pricing pressures might begin to slowly ease.

 

Energy prices

Whilst the global economic recovery is boosting demand for oil and gas, it is happening at a time when supply growth is static and is therefore putting upward pressure on prices.

Governments have been encouraging energy companies to spend more money on renewable energy sources, but this has often come at the expense of spending on traditional energy exploration and production. And, while renewables may be the long term future, for the immediate future it is still oil and gas that powers much of the world.

Until such time as a significant transition to renewable energy sources can be achieved, traditional energy prices look likely to stay elevated.

 

NZ residential property

A report from independent real estate consultancy firm Knight Frank highlighted New Zealand’s residential real estate prices led the world over the last five years (up 60%), although slipping to third on the index this year.

Some of the contributing factors behind this strong performance are widely acknowledged:

• New Zealanders have historically been highly enthusiastic property investors.
• New Zealand has enjoyed strong positive net migration (up to March 2020).
• There is a relative scarcity of housing stock currently available.
• The recent availability of extremely low mortgage interest rates.
• Housing has been seen as an appealing investment option for many Kiwis unexpectedly grounded due to Covid lockdowns.

However, with interest rates in New Zealand now on the rise and pipeline building consents much higher, there are reasons to think the pace of the recent price rises could ease in 2022.

 

Reduced financial stimulus

In 2020, aiming to defy a potentially devastating economic outcome from Covid-19, global central banks quickly provided unprecedented levels of financial support to markets. Almost two years later, albeit with a very hefty price tag, this strategy seems to have achieved its goal.

Apart from an initial slump in February/March 2020, markets have continued to function effectively. Many companies were able to survive or even thrive in the intervening months, and unemployment levels in key developed markets are now significantly lower than most 2020 projections.

Now however, with global economic growth indicators remaining positive and inflation currently spiking around much of the world, central bankers are reviewing the extent to which this significant financial stimulus may still be required. The higher inflation rates alone are an indicator that the patient is ‘responding to the medication’, and that perhaps the central banks can begin to look to reduce the dosage.

As financial stimulus programmes gradually begin to wind down and the world takes a collective step back towards a more conventional monetary policy approach, this creates another uncertainty. After years of abnormally supportive policy settings, weaning the patient off this stimulatory financial medication entirely is unlikely to be smooth transition.

 

 

What lies ahead?

We could offer you our best guess, but if we did you should be sceptical.

In spite of interpreting some of the information currently available in the markets in an effort to provide a broader context, there is no reliable link between this information and future market performance, especially in the short term. Thankfully, it’s not a problem we grapple with alone. In truth, all investors, including all professional investors, suffer from the same problem. We just don’t know, and can’t know with certainty, what the future holds.

Over a long term horizon, shares will always have greater performance potential than bonds, and this continues to hold true today even though share markets have generally been performing very well for a long time. With interest rates still at relatively low levels in developed markets, overall return expectations from all fixed interest assets remains more subdued, at least for the time being.

However, given the much higher variation in returns that accompanies share market investments, investors with a high exposure to shares inevitably need to navigate a fairly bumpy path. To balance out the bumps, maintaining a diversified portfolio of risk premia, including an appropriate mixture (for you) of higher risk and lower risk assets, will almost always be the best approach.

The mistake a lot of individual investors make on their own account is they often unwittingly end up taking investment risks not well suited to their needs. Chasing returns is one thing; managing risk is something else entirely. Knitting these two together is where good advice and a prudent Synergy investment portfolio sit.

 

For a detailed review of the asset class performances for the quarter, see ‘Key market movements’ or click here to view the full newsletter in PDF.

 

Disclaimer

Information contained in this newsletter does not constitute personalised financial advice because it does not take into account your individual circumstances or objectives. You should carefully consider whether the Synergy investment portfolios are appropriate for you, read the applicable offer documentation, and seek appropriate professional advice before making any investment decision. The information in this newsletter is of a general nature only. Investors should be aware that the future performance of the Synergy investment portfolios may differ from historic performance. Details are correct as at the date of preparation and are subject to change. The investment objectives and strategies of the Synergy investment portfolios may change in the future.

While every care has been taken in its preparation, Consilium NZ Limited (‘Consilium’) makes no representation or warranty as to the accuracy or completeness of the information in this newsletter and does not accept any liability for reliance on it. The capital value, performance, principal, and returns of the Synergy investment portfolios are not guaranteed or secured in any way by Consilium, or any other person. Investments in the Synergy investment portfolios do not represent deposits or other liabilities of Consilium and are subject to investment risk, including possible loss of income and principal invested.