Market Review

Market Returns – a whistle-stop tour of some of the movers and shakers during the year.

The chart shows the returns in local currency across a cross sample of major indices.

The table shows returns broken down by asset class and geography but this time in sterling. With sterling strengthening against the euro and the yen and only marginally losing ground versus the US dollar, this detracted from returns in overseas markets, in particular those from Japan where yen weakness versus sterling is down 9% in 2021 (so returns for local Japanese investors were even better!).

By and large, 2021 was a strong year for equity market returns with US, European & UK equities all returning solid returns to investors in local currency. When translated back to sterling Japanese equity returns look more muted given the relative weakness of the yen, but all in all 2021 was a pretty good year to be invested. There were relatively few shocks along the way, rising bond yields in Q1 and early autumn caused some hiccoughs but by year end the VIX index (a measure of equity market volatility) had risen as Omicron and fears of lockdown spiked concern.

There were areas which struggled more than others with emerging markets being an area of notable weakness. “Emerging markets” is a broad church and there were still areas of the emerging world that performed particularly well. India, Taiwan and Russia all delivered double digit returns for the year, but it was China’s weighty index percentage and poor returns that dragged the broad EM index lower. China is the largest country in the MSCI Emerging Markets index, representing over a third of the index, so a fall of over 20% provided a significant headwind for the index to make much headway. We have previously written in these pages about the reasons for China’s underperformance this year, but they can be summarised by highlighting two points. First, the Chinese government announced sweeping regulatory crackdowns in certain sectors, such as education, healthcare and internet infrastructure as part of Xi’s ‘common prosperity’ agenda. Second, concerns over the Chinese property sector rose as property developer Evergrande faced looming bankruptcy. Evergrande is no small fish; its total liabilities are estimated to be equivalent to 1.8% of China’s entire GDP or $314bn of which $124bn falls due in the next 12 months. As its order book has 1.7m units awaiting completion, its fate takes on another level of significance. China is employing a policy of containment – seeking to support “quality” companies trying to buy assets from struggling rivals at distressed prices whilst supporting the broader economy with domestic banks lowering borrowing costs and the People’s Bank of China reducing the amount of cash banks are required to hold in reserve to stimulate lending.

The following table shows the winners and losers in terms of industrial sector and style for 2021 in local currency:

According to the Factset, corporate earnings for S&P 500 companies for 2021 are estimated to hit 45%, the highest since it began tracking the measure back in 2008. Whilst the strength of these earnings is unlikely to be repeated for many a year they have, through the course of 2021, allowed valuations to come off their recent highs even in an environment of rising stock markets. By year end, P/E ratios in the States were still a long way ahead of their long-term averages as investors were being required to pay handsomely to access the dynamism and strong corporate earnings environment. Some areas whether that be the UK, emerging markets or Japan were looking relatively attractive versus their own histories but lack an immediate catalyst to unlock that gap. As an example of how unloved UK equities have become, the market cap value of Apple is now more than the entire FTSE 100!

The growth versus value gap closed the year with both investment styles all but neck and neck. It was an interesting feature of 2021 that whenever value moved significantly ahead of growth, particularly in Q1 when bond yields moved upward and then again in late summer the advantage quickly dissipated. Growth has been the predominant investment style for over a decade now and whilst 2021  may have witnessed a minor victory for champions of ‘value’, there was certainly no knock-out blow.

Fixed Income

The final quarter saw central banks turn rhetoric into action as it witnessed the US Federal Reserve announce a speedier pace to the winding up of its QE programme and even a rate rise from the Bank of England. It was though a largely benign quarter for corporate credit markets with all the action being found in the government bond market. As was the story for much of 2021, the volatility and price movement in longer-duration assets, particularly index-linkers, was equity-like in nature. Holders of index-linked tracker had a hair-raising rise through 2021. Down 10% by the end of February, before recovering to a +11% return by the time advent calendars were being opened. They finished the year posting a 3.8% return for the year.

We don’t like such excitement in our fixed income selections and have sought shelter in several short-dated fixed income funds or strategic bond funds which have some tools to help mitigate against the negative effect of rising bond yields.


Ever since the 2016 EU Referendum, sterling has generally been only making headlines for the wrong reasons, but 2021 saw a welcome bit of warmth shine down on our pounds and pennies with a strengthening against the euro and particularly the yen. For those dusting off the holiday brochures over the Christmas period, Turkey would have been making many a seasonal shortlist after the collapse in the Lira.

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