Market Overview – December 2021

Market Overview – December 2021

The Market Snapshot provides an overview of key events that influenced financial markets over the course of December 2021.

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Market Overview – December 2021

It was a strong close to the end of 2021 as investors shrugged off concerns around the Omicron variant of the Coronavirus and tightening global monetary policies – many equity markets reached fresh highs. Apart from renewed optimism over global growth, support also came from news that some progress had been made in developing a “universal” vaccine against any possible variant of the Coronavirus. However, the Federal Reserve’s shift to a more aggressive view on the interest rate hiking cycle in the US, as well as similar signals from some of the other major central banks, weighed on global bonds and US Treasuries. In South Africa, December was kind to local market participants as SA equities posted strong returns, outperforming most other emerging markets. Local bonds also gained ground, ending with the world’s highest bond returns for the year in local currency terms.

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 4.0% for the month. Developed markets outperformed emerging markets, with the MSCI World Index returning 4.3% and the MSCI Emerging Markets Index delivering 1.9%.

In the US, the Federal Reserve (Fed) shifted to a more aggressive inflation-fighting stance, doubling the pace of its planned reduction in asset purchases and also bringing forward the timing of its expected rate hikes – the Fed now sees an average of three 0.25% rate hikes in 2022. This came as US CPI jumped to 6.8% y/y in November, the highest since 1982, while producer prices (PPI) soared to 9.6% y/y, fuelled by energy price increases and ongoing supply chain blockages.

In other news, Congressional opposition to President Biden’s nearly US$2 trillion “Build Back Better” programme curbed some optimism for economic growth. However, the Conference Board estimated US GDP growth at 6.5% y/y in Q4 of 2021, and 5.6% for the full year, the highest in decades. Consensus expectations for 2022 averaged around 4.0%, still above average. Meanwhile, the US unemployment rate continued to fall, reaching 4.2% in November from 4.6% in October, comfortably beating market expectations of 4.5%. And although December Manufacturing PMI decreased to 57.8 from 58.3 the previous month as factory production remained constrained, the survey encouragingly also indicated that supply constraints showed signs of easing.

US equities closed the month higher, with the S&P 500 returning 4.5% and the Dow Jones Industrial 5.5%, while the technology-heavy Nasdaq Composite lagged at  0.7% (all in US$).

Following the South African Reserve Bank (SARB)’s 25bp repo rate hike in November, data showed CPI rose to 5.5% y/y and PPI hit a 10-year high of 9.6% y/y in November, largely driven by higher fuel prices, reinforcing expectations for more interest rate hikes from the SARB in 2022. The MPC’s latest forecasts show a gradual rate hiking cycle, with the repo rate reaching approximately 5.0% by December 2022, 6.0% at the end of 2023 and 6.75% by end-2024.

Forecasts for SA GDP growth show a consensus of around 5.1% for 2021, falling to around 2.0% in 2022, as the economy faces headwinds such as the continuation of the Coronavirus pandemic, slowing global growth, rising interest rates, further power constraints and lower government spending, among others. Commodity prices, which provided a strong underpin to SARS revenue collections and the local equity market in 2021, are likely to be less supportive in 2022. The SARB’s expectations are for growth of 5.3% in 2021, falling to 1.7% in 2022 and 1.8% in 2023.

Global ratings agency Fitch unexpectedly upgraded South Africa’s sovereign credit rating outlook to stable from negative during the month, citing a faster-than-expected economic recovery and stronger fiscal position, while affirming its rating at BB-. SA’s four largest banks also received an improved outlook for their debt, signalling that the worst is likely behind them.

SA equities posted robust December gains, with the FTSE/JSE ALSI returning 4.8%.

For the 2021 year, the ALSI returned the most in 10 years at 29.2% thanks to strong performances from Listed Property and Resources.

In what was a generally weak year globally for bonds as interest rates started to rise, SA bonds registered a world-beating 8.4% annual return in rands (-0.7% in US$), and closed 2021 with a 2.7% performance in December.

SA inflation-linked bonds delivered 4.5% in December and 15.5% for the year, outperforming their nominal counterparts, and cash (as measured by the STeFI Composite) posted returns of 0.3% in December and 3.8% for the year.

Finally, the rand recorded a mixed performance against the major currencies in December, losing 0.2% against a weak US dollar and 1.4% against the pound sterling but gaining 0.2% against the euro. For the year it depreciated 9.1% versus the US dollar, 8.0% versus sterling and 0.9% against the euro.

The Bank of England hiked its base interest rate to 0.25%, finally moving off its historic 0.1% low, amid a jump in CPI to 5.1% y/y in November, it’s highest in 10 years and far above the BoE’s 2% target. In December the UK’s GDP was only 0.5% below its pre-Coronavirus levels, and the OECD expects it to grow by 6.9% in 2021 before slowing to 4.7% in 2022 and 2.1% in 2023.

Meanwhile, the European Central Bank left its base rate unchanged at its December meeting, but cut its bond buying as planned, trying to balance soaring inflation (at a 25-year high of 4.9% y/y) with Omicron’s negative impact on economic growth. The OECD is projecting that Euro-area GDP growth will record a strong rebound of 5.3% for 2021 and then decelerate to 4.3% in 2022 and 2.5% in 2023.

For December, the UK and France posted robust equity returns: the UK’s FTSE 100 returned 7.2%, Germany’s DAX 5.9% and France’s CAC 40 7.6%. For the year, the UK’s FTSE 100 delivered 17.4%, Germany’s DAX 6.7% and France’s CAC 40 22.6% (all in US$).

Institutions including the World Bank lowered forecasts for China’s 2021 GDP growth to around 8.0%, the result of a slowdown towards year-end that was partly due to subdued consumer spending, Covid outbreaks and very strict government containment measures, as well as a slumping property market. With the Chinese economic cycle ahead of Western countries’, its 2022 growth is now expected at around 5%, the lowest in decades.

The People’s Bank of China (PBoC) cut its one-year loan prime rate for businesses and households to 3.8% from 3.85% in a move to bolster growth, even as its lower reserve requirements for banks also took effect. Manufacturing PMI rose slightly to 50.9 in December in a sign of rising output and easing supply constraints, while retail sales surprised to the downside at 3.9% y/y, versus the 4.6% y/y forecast.

The Japanese economy, which has been particularly hard-hit by the pandemic and slower to recover than other large economies, is expected to record growth of only 1.8% in 2021 and then accelerate to 3.4% in 2022 as the government’s new financial aid package takes effect, before slowing to 1.1% in 2023, according to the OECD.  With inflation still well below the Bank of Japan’s 2.0% target, the BOJ kept its interest rates ultra-low in December and extended its support for small companies, promising to maintain its dovish stance as necessary.

Japan’s Nikkei 225 delivered 2.2% in December but was one of the few large equity markets to record a loss in 2021 at -4.4% (in US$). Other prominent bourses in the red were China and Hong Kong due to the government’s regulatory and democratic crackdowns, and strict anti-Covid measures. The MSCI China lost 3.2% in December and delivered -21.6% for 2021, while Hong Kong’s Hang Seng fell 0.3% for the month and posted a -12.3% return in 2021 (all in US$).

Video and adapted article by M and G Investments

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