2021 saw markets dominated by three, primarily interlinked factors: the still present pandemic, rising inflation and potential withdrawal of central bank stimulus. All three of these factors could have played a large role in damaging the prospects for equity markets, though the year saw many indices reach new highs again.
The final quarter of 2021 saw developed markets continue their rally whilst developing markets experienced a slowdown in performance. 2021 started with a general feel of optimism, successful vaccine roll outs brought the world to see light at the end of the pandemic tunnel. However, this optimism was challenged by the discovery of Delta, and the more contagious variant Omicron. This brought a heightened sense of uncertainty, which seeped into markets, although it was mostly short lived as scientists in South Africa and the UK confirmed the new variant had a lower chance of developing into severe illness. Inflation has gone from a potential concern to being well and truly present. Increased levels of inflation brought with it concerns around the wider macro-economic environment and doubts over the federal reserve’s initial guidance on it being transitory. Some elements of inflation are likely to stay longer than originally thought.
The chart above shows the performance of the worlds major indices over the past quarter to provide an indication of how global stock markets behaved. As it has done throughout the year, the Nikkei remained true to its style, altering from top performer in Q3 to showing the worst performance of the group over the final quarter due to tightened COVID-19 restrictions. The S&P 500 demonstrated a strong finish to the year followed by the FTSE All Share which, despite a sharp downturn due to Omicron fears, still finished the quarter with returns of nearly 5%. European markets showed a similar result to the UK based FTSE, though less volatile. It was the Asian and Emerging markets which struggled through the quarter, primarily staying stagnant but finishing off on a decline, impacted by inflationary concerns, rising shipping costs and ongoing political developments.
Overall, global stock markets emerged well from the scares witnessed in 2020. The debate we saw within stock markets was focused on ‘value vs growth’; a battle between two different styles of businesses to emerge the winners of the year. The more cyclical, traditional stocks we see in the value park started the year strong after a long period of underperformance, though it was the more tech orientated growth style which finished the year on top. This swift comeback did bring some attention towards the high levels of concentrated returns we see in the market, with some of the US focused ‘mega cap’ tech companies particularly strong.
While we witnessed strong returns within global equity markets over the year, the challenges faced from the pandemic are expected to remain. Central banks will begin withdrawing the pandemic support whilst also looking to raise rates to combat inflation. Higher prices are a constraint on consumer spending; together with higher interest rates and potential tax increases could see economic growth struggle after bouncing back from the pandemic. It is unlikely that we will see drastic fiscal and monetary policy both in place which could hurt the already fragile economy, we therefore expect to see interest rate rises to be moderate, and less frequent than the market currently has priced in.
FCFP portfolio performance
In the chart above we see the performance of our FCFP portfolios over the most recent quarter. The UK centric FTSE All Share performance is used as a point of familiar reference only. Being UK centric and 100% equity based, it is more volatile than our geographically diverse portfolios. The FCFP portfolios demonstrate a similar journey over the quarter to the way in which developed markets behaved, particularly to the S&P, with strong finishes throughout. However, evidently the greater levels of diversification and varying risk levels across the range show their involvement through the smoother journey across all portfolios. Similar to the last quarterly update, the FTSE All Share illustrates a greater volatility level, indicative of the uncertain times we find ourselves in. This heightened risk in this case has resulted in a greater return being achieved within the index though at the cost of a more volatile, and significantly less asset and geographically diverse strategy.
Longer term performance
To provide some context of longer term performance, the chart above illustrates the performance of the FCFP portfolios since their inception in 2020 to the most recent quarter end. Now reaching two full years we are beginning to able to see a more comprehensive view of the portfolio characteristics through different market conditions. The portfolios are all providing returns in line with our expectations and targets for the relevant risk levels, whilst also showing a lower level of volatility when compared with a less diverse option such as the FTSE All Share. The FCFP portfolios continue to adopt a multi-asset, geographically diverse approach to investing, with our managers’ focus continuing to seek high quality investments.
Equity markets managed to push through the scares of 2021 to focus on a post pandemic recovery. The value versus growth debate we saw play out through the year is likely to continue, as is the wide dispersion of returns we see in markets. Our investment managers’ eyes remain focused on the long-term view with the aim to invest in high quality companies, with promising business plans and strong cash-flows.