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January 6, 2022/FSDH Research
Global equities market 2021 review & 2022 outlook: Year of cheer but murky waters ahead
2021 was a year of cheer for the global equities market as various positive triggers combined to outweigh negative soundbites, stoking bullish investor sentiments with investors preferring a risk-on approach in 2021. At the start of the year, attention was fixed on President Biden’s $1.9tn covid relief bill, designed to boost consumer pockets, strengthen demand and achieve a broad range of other objectives such as expanding the coverage of the Obamacare program. Successful passage of the bill which saw direct stimulus cheques worth $1,400 disbursed to Americans triggered significant buying interest in equities on expectations of a stronger recovery following further fiscal interventions. In addition, a dovish policy stance from the Fed and other global monetary authorities supported investors’ interest in equities. Again, these interventions strengthened consumer demand, kept credit cheap and consequently supported robust economic recovery which ultimately delivered strong corporate earnings, providing investors with further reasons to be bullish on equities. Lastly, apparent adjustment to the new normal amid improving vaccination rates across key economies allayed investors’ fear on covid albeit with moments of trepidation such as when new variants emerged.
In this regard, the global equity market closed the year on a strong note with the MSCI World Index gaining 20.1% to close 2021 at 3,231.73 points. Similarly, other major benchmarks closed the year higher with the US indices, S&P 500 (+26.9% y/y), NASDAQ Composite (+21.4% y/y), & DJIA (+18.7% y/y) closing the year strong. In Europe, the narrative was similar as the benchmark European index, STOXX 600, gained 22.2% in 2021. Across countries, the UK FTSE 100 gained 14.3% y/y, the French CAC 40 gained +28.9% y/y while the German XETRA DAX gained +15.8% y/y.
Heading into 2022, the outlook for the global equity environment appears to be muddied as several headwinds continue to emerge with momentum slowing towards the end of 2021. The first key determinant of global equity market performance in 2022 is the monetary policy decisions by policy authorities across the globe. Clearly, 2021 ended on a hawkish note with most monetary authorities stating intentions to taper asset purchases and begin rate hikes. For example, the US Federal Open Market Committee (FOMC) indicated plans to speed up asset purchases tapering, expected to end Mar-2022 (vs. Jun-2022 previously), while it announced expectations of three rate hikes in 2022 compared to initial expectations of one rate hike. On the extreme, the Bank of England (BOE) announced a rate hike of 15 bps to its benchmark interest rate to print at 0.25%. Thus, we can establish that monetary policy tone in 2022 is set to be hawkish. Consequently, we expect fixed income yields to surge higher, making bonds and treasuries more attractive as they climb from record low yields. This will possibly trigger asset rotation from investors as funds flow out of equities to fixed income assets.
Another key focus will be covid-19 developments as investors remain very sensitive to unfavourable news on this front such as the emergence of the omicron variant. New variants continue to emerge as scientists and health authorities struggle to find a lasting solution to the covid crisis. Therefore, while investors’ dampened sentiment due to the recent omicron variant has been allayed by reduced concerns on severity of the variant, emergence of a more infectious and severe variant could represent a spanner in the works for the global equity market in 2022. Lastly, the economic growth discourse will be a vital component of investors’ considerations in 2022. The International Monetary Fund (IMF) continues to remain bullish on economic growth outlook with a 4.9% growth projection for the global economy). This may be a positive for investors in 2022 if this growth projection is achieved.
So, what should guide investor decisions in the global equities market in 2022? We believe 2022 will be a very different year from 2021 as virtually every stock rallied at different points in 2021 due to the stock frenzy and stimulus packages that kept financial system liquidity robust, triggering excessive risk taking, particularly among retail investors. In 2022, we underscore that a more strategic and organized approach to stock selection and investment will be required to navigate the murky waters ahead. As a result, we provide our guidance on the top sectors investors should focus on in the US market in 2022:
- Financials: With the Fed projected to end asset purchases in Q1-2022 and a series of rate hikes to follow, interest rates are expected to trot higher at a rapid rate in 2022. Historically, long term rates rise faster than short term rates which gives banks opportunity to lend or create long term loans at higher interest rates while interest rate on customer deposits at the shorter end of the curve will increase at a slower pace. This implies a robust Net Interest Margin (NIM) for lenders in the US. For investors with a lower risk appetite, JP Morgan Chase (NYSE: JPM) would be an interesting opportunity. For those with a higher risk appetite, regional banks tend to appreciate faster than their established counterparts and we favour Truist Financials (NYSE: TFC) who is a recent product of Merger of Equals (MOE) between BB&T Bank and SunTrust Bank which created America’s sixth largest bank.
- Semiconductors: 2021 was a blowout year for semiconductor stocks as disruptions to supply chains across the globe opened up a significant supply shortage of chips, sending prices higher. Thus, companies like NVIDIA (NASDAQ: NVDA) benefitted massively from the rally. Heading into 2022, the supply chain disruptions appear to be easing but the supply shortage of chips is expected to remain for an extended period before a return to normalcy. In this sector, we prefer NVIDIA (NASDAQ: NVDA) above its peers due to superior growth prospects.
- Energy: We also favour the energy sector in 2022 with energy costs expected to remain sticky upwards in the US. However, we note the increased drive by the US government to adopt green energy solutions. Thus, we favour oil & gas companies with presence in both segments which sees us pick Chevron (NYSE: CVX) as our preferred stock. In addition, its robust dividend payment provides an additional sweetner in an inflationary environment.
Fig 1: Global Equities 2021 Market Performance Fig 2: Monthly S&P 500 Performance
Fig 3: S&P 500 Sector Performance in 2021
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