Asset Class Review 2021
Equities
Although inflation concerns led to higher volatility, the global economic recovery drove strong returns in equities with Developed Markets leading the surge. The US equity market’s broad-based gains will help to increase its resilience going forward. The Energy (+34.9%) and Utilities (+1.4%) sectors were the outliers. While the strong economic recovery and resource constraints were positive for Energy, they were detrimental to Utilities.
European equities lagged behind US equities, but eventually ended the year on a strong note. With a higher exposure to value companies, European equities remain a good opportunity for investors. Despite struggles to contain COVID-19, export-oriented Japanese equities were supported by a cheaper Japanese Yen (JPY), higher anticipated demand from the reopening of Western markets and progress on vaccinations.
Asian ex-Japan equities were held back by uncertainty over China’s reforms. Beijing increased regulatory pressure on sectors such as Technology, Online Education and E-commerce while China’s central bank reduced liquidity despite the strong economy. In Emerging Markets, challenges in securing vaccine supplies posed a roadblock to economic reopening.
Fixed Income
Stronger economic growth drove a risk-on sentiment in markets. Fears over inflation and expectations of a hike in interest rates pushed up longer-term US Treasury yields, which sent bond prices lower across the board. However, narrowing spreads that provided a buffer against rising yields and a stronger economic recovery that lowered default risks, supported US High-Yield bond prices.
Asian Investment Grade (IG) bonds held steady and remain attractive for their defensive characteristics and higher yield. Asian and certain Emerging Market local-currency debt came under pressure, but was compensated by the CNY’s strength against the USD. Asian High-Yield bonds were badly hit by credit concerns in China’s Property sector as a large portion of high-yield corporate issuers come from that industry.
Currencies and Commodities
The USD added gains in 2021 due to rising bond yields, but cyclical and risk currencies like the CNY strengthened even more as a result of a positive growth outlook. This is likely to reverse in 2022 as the Fed’s monetary policy tightening should lead to renewed USD strength, relative to Asian currencies like the CNY.
Strong economic growth and supply chain shortages fuelled strong demand for Oil and Copper, which recorded solid double-digit gains. However, gold prices fell as the USD strengthened on expectations that the Fed would start tapering asset purchases.
Currencies
Commodities
Source: Bloomberg. All percentages shown are expressed in their respective local currency terms and reflect the total returns between 1 January and 30 November 2021.
