Market Commentary January 2022

Aetas Wealth

Despite the pandemic, 2021 was a good year for the majority of stock markets we report on in the Bulletin.

We wrote that a year ago and – irrespective of all the ups and downs it brought – 2021 was another good year for world stock markets. All but one of the markets we cover gained ground in December, and all but two made gains in the calendar year – with three markets up by more than 20%.

As we did in December last year, we’ve added an extra section to the Bulletin covering stock market performance over the last 12 months. First though, the news from December – a month when there were more diplomatic spats between the major powers.

Tensions continued to rise over the Russian troops stationed on the Ukraine’s borders and worries persisted about the supply of Russian gas to Europe. The UK and US announced that they would not be sending diplomats to the Winter Olympics in Beijing. Vladimir Putin said he definitely would be going, while French President Emmanuel Macron dismissed any boycott as ‘insignificant’.

Perhaps of greater long term significance was the suggestion that China might soon have its first naval base on the Atlantic coast, courtesy of a deep water port in Equatorial Guinea.

In the UK, the Government suffered a defeat in the North Shropshire by-election, and lost its chief EU negotiator when Lord Frost resigned. Retail finally recovered to pre-pandemic levels but – almost inevitably – it was online sales that were responsible.

As always, let us look at all the detail as 2021 drew to a close…

As we have mentioned above, the Government lost the North Shropshire by-election, a seat it had previously held for 200 years.

Several factors may have contributed to this defeat, such as reports of parties at Downing Street and Whitehall that breached Covid rules, as well as wider concerns over the economy and inflation.

We have written below about increasing energy prices and worries about inflation in the US and Germany. In the UK, the Bank of England suggested that inflation ‘might reach’ 5% next year. Exactly a week later, figures for November showed that inflation had hit 5.1%, as newspaper headlines suggested that rising costs could see the average family spending £1,700 more next year.

The Bank of England responded to the inflationary pressure by raising interest rates to 0.25% and – as in many countries – further rises look likely next year. This came as figures showed the UK economy grew by just 0.1% in October (with most experts having forecast 0.4%), with growth for the third quarter revised down to 1.1% from the previous 1.3%.

Let us cast around for some Christmas cheer. The UK signed the long-anticipated free trade deal with Australia; job vacancies reached another record high as the unemployment rate fell to 4.2% and, in a tale of British success, Doc Martens more than weathered the pandemic storm, selling 6.3m pairs of boots and shoes around the world in the last year and posting a £61m profit.

The UK is storming ahead of Europe in tech investments: of the 321 ‘unicorns’ in Europe (start-ups with a valuation of more than $1bn), over 100 are in the UK – with Germany and France having just 51 and 31 respectively. Chancellor Rishi Sunak is apparently gearing up to ‘slash’ both income tax and VAT before the next election – and the Government’s borrowing was down in November.

The figure of £17.4bn was lower than last November – but it was more than had been forecast by economists and, in truth, bad news was never far away in December. Figures for November showed that car production had fallen by nearly 29%, marking the fifth consecutive month of decline.

But the major worry for UK householders was the forecast of rising fuel bills, with even some of the more conservative suggestions indicating a rise of up to 50% next year.

What of the national high street? As we mentioned in the introduction, UK spending is now back to pre-pandemic levels, but inevitably this has been thanks to ‘Brits rushing to online shopping’ as lockdowns and advice to work from home continued. London offices were reported to be at 10% occupancy in the run-up to Christmas.

Elsewhere the closures continued: TSB is set to shut 70 bank branches by July of next year and 400 more pubs were reported to have closed this year. By and large, fears over the virus meant that shoppers avoided town centres both before and after Christmas, and the latest reports from the hospitality sector suggest that 50% of the Christmas trade was lost.

December was, though, a good month for the FTSE-100 index of leading shares, which rose 5% to end the year at 7,385. The pound ended the year trading at $1.3532 – up 2% against the dollar in December but down 1% for the year as a whole.

As we wrote in November’s Bulletin, a new coalition government was eventually agreed following September’s elections in Germany and December saw Olaf Scholz, the leader of the Social Democrats, sworn in as Chancellor. The centre-left Social Democrats will govern alongside the Greens – whose leader Annalena Baerbock will become Foreign Minister – and the pro-business Free Democrats.

The new government plans to borrow significant amounts to fund its plans for the digitisation and de-carbonisation of the German economy. It will be interesting to see what impact this has on German inflation, which reached 5.2% in November, the highest level since June 1992.

Away from the new government in Germany, December in Europe was a tale of oft-repeated themes. Several countries tightened restrictions as the Omicron variant spread across the continent. Holland was just one example: Prime Minister Mark Rutte called the measures “unavoidable” as he ordered non-essential shops, gyms, bars, hairdressers and other public venues to close until January 14th.

The arguments over gas rumbled on as well. The EU claimed to be reconsidering its position on long-term gas contracts with Russia, but The Kremlin said any crisis in gas supply was of Europe’s making. You suspect that the hard-pressed consumer paying their bill worries more about the amount owing than about whose fault it is. A few days before Christmas, European gas prices climbed to record highs as flows on the Yamal-Europe pipeline started flowing back towards Russia.

We have mentioned China’s ‘belt and road’ initiative many times in this Bulletin. December saw similar moves from the EU, which revealed details of a €300bn (£252bn) global investment plan, described by Commission President Ursula von der Leyen as a “true alternative” to China’s approach.

So were Europe’s stock markets marching in step with the global investment plan in December? Or shivering in the cold as the gas flowed back to Russia? Very much the former: Germany’s DAX index was up 5% to 15,885 while the French stock market went one better, rising 6% to end the month at 7,153.

December started positively in the US. Speaking at the beginning of the month, President Biden said the US economy “was in strong shape” ahead of the holiday season. He declared that policies to free up supply chain blockages were working, and predicted that price rises would soon start to ease. “It’s not because of luck,” he said.

Sadly the luck seemed to run out the very next day, when it was revealed that the US economy added only 210,000 jobs in November – way below economists’ expectations of 550,000 – although this still saw the unemployment rate fall to 4.2%.

By the middle of the month, the President’s optimism looked even wider of the mark, as figures for November showed inflation rising to 6.8%, the highest level for almost 40 years. With the shipping ‘logjam’ reportedly getting worse, not better, and truck orders at their lowest level for 26 years, the supply chain problems looked set to continue.

The other problem which the US – like all major economies – will need to deal with in the coming year is inflation, with the Biden administration committed to pumping billions into infrastructure projects. Could it rise even higher than the figure recorded for November?

Chairman of the Federal Reserve Jerome Powell admitted that the Omicron variant had added a ‘new level of uncertainty’ around inflation. By the middle of the month, the Fed had decided to cut back its economic stimulus package more quickly than previously planned. The consensus now seems to be that there will be two or three increases in interest rates next year as the central bank looks to keep inflation under control.

In company news, Tesla moved its HQ from California to Texas – and if you have a tax bill to pay in January, spare a thought for Tesla boss Elon Musk, who will apparently be paying over $11bn (£8.14bn) in tax this year.

Meanwhile, Apple was reported to be struggling to keep up with Google and Amazon in the ‘future readiness’ league table. A study for the Institute of Management Development put Tesla, Google, Mastercard and Lululemon (a clothing company) at the top of their rankings. Apple were listed in the laggards, along with Audi, HSBC, Twitter and IBM. Presumably the rankings were done before it was revealed that Tesla was to recall 475,000 vehicles for safety reasons – virtually equivalent to the 500,000 vehicles it delivered last year.

Whatever the worries about inflation and disappointing jobs numbers, US stock markets were in buoyant mood in the final month of 2021. The Dow Jones index rose 5% to 36,338 while the more broadly-based S&P500 index was up 4% to 4,766.

China and Far East
December was another month in which the Chinese Communist Party flexed its muscles. We have written previously about Xi Jinping’s policy of ‘common prosperity:’ more and more this seems to be about penalising companies and individuals who have been successful and/or who have butted up against the authority of Beijing.

December saw China’s top internet live streamer, Huang Wei, fined 1.34bn yuan – around £160m – for tax evasion. This was part of a general crackdown on celebrities and social media personalities, who were told they had until December 31st to pay any outstanding tax or ‘face severe penalties’.

Even footballers did not escape the party’s disapproval – not for tax but for tattoos. The month ended with them being told to remove or cover up any tattoos ‘for the good of society.’

A rather more serious penalty was suffered by Didi, China’s leading ride-hailing app. The company made its debut on the New York stock market earlier this year, only for the Government to almost immediately order online stores to stop offering the company’s app, in another example of Beijing’s clampdown on China’s technology sector. The company recently announced that it will move its share listing from New York to Hong Kong – as it also reported a loss of $6.3bn (£4.7bn) for the first nine months of the year, with revenues in China down 5% in the third quarter.

How long will it be until TikTok gets the same treatment? The company leapt from seventh place in 2020 to become the internet’s most visited site in 2021, replacing Google in the number one spot. (Facebook was third, followed by Microsoft, Apple and Amazon).

Away from 60-second dance videos, there was some worrying news for the wider Chinese economy, with the most recent figures for industrial production, retail sales and the rate of unemployment all failing to match analysts’ forecasts. Car sales were also down – for the seventh month in a row – and China’s central bank responded to the poor figures by cutting the RRR: the Reserve Requirement Ratio. Simply put, that is the amount of reserves banks must hold. The cut released some 1.2tn yuan (£139bn) into the economy in a bid to stimulate growth in the coming year.

We have written previously of the problems of the Chinese property sector in general and Evergrande in particular. The company limped on through December, with some pundits saying its default is only a matter of time, while others insist that the government will have to step in. While Evergrande is making all the headlines, there are several other Chinese property companies with similar liquidity problems.

In Japan, Toyota reacted to one of the perennial themes of 2021 – problems in the global supply chain – by announcing that it will extend production stoppages at some factories in Japan. Land Cruiser and Lexus production was hit by the delays, with the company estimating that 14,000 vehicles were lost.

Let us end this section where we began. The first ‘patriots only’ elections were held for the Hong Kong legislature and voter turnout fell to a record low. The month ended with the pro-democracy website Stand News being forced to close following a police raid and the arrest of six editors and former editors. With universities also being forced to remove memorials to the victims of the Tiananmen Square massacre, 2022 does not promise to be a happy year for pro-democracy activists in Hong Kong.

What of the region’s stock markets? South Korea led the way in December, rising 5% to close the month at 2,978. Japan’s Nikkei Dow index rose 3% to 28,792 and China’s Shanghai Composite index was up 2% at 3,640. The Hong Kong stock market has had a poor year and was unchained in percentage terms in December, ending the month at 23,398.

Emerging Markets
As we have written in previous Bulletins, this year saw El Salvador become the first country to accept Bitcoin as legal tender. In December, another country took a step in that direction as Colombia’s biggest bank started offering customers trading in the cryptocurrency. The Colombian government has launched a one-year programme to ‘bring cryptocurrency services to customers in a more straightforward manner’.

Staying with money whirling through hyperspace, there are suggestions that the White House will push for Russia ‘to be kicked out’ of SWIFT if it invades Ukraine. SWIFT is the global interbank payments system which facilitates trade between countries. At first glance, this would seem to be a punitive sanction, but there have been suggestions for some time that Russia, China and India have been discussing their own alternative to SWIFT, with some sources suggesting the move could come before the end of 2022. The Biden Administration may need to consider the Law of Unintended Consequences, especially with Vladimir Putin naming China as Russia’s “number one partner” in an end of year press conference.

December was a good month for the Brazilian stock market – although as we will see below, it was small consolation at the end of a disappointing year. The market rose 3% to close the month at 104,822. The Indian stock market was also up, rising by 2% to finish at 58,254. The Moscow stock market went in the other direction, however, falling back 3% in December to close at 3,787.

World Stock Markets in 2021
As we commented above, many of the world’s leading stock markets had good years in 2020 despite the pandemic. South Korea led the way with a rise of 31% in the year, followed by Japan and India, with both countries recording gains of 16%. Sadly the ‘wooden spoon’ went to the FTSE-100, which fell 14% to give the UK stock market its worst year since the financial crisis.

So who topped the table in 2021? The médaille d’or goes to France, where the CAC-40 index rose 29% in the year. Elsewhere in Europe the German index was up 16%, while the FTSE-100 regained nearly all the ground lost last year, with a rise of 14%.

In the US, the S&P500 index had an excellent year, and came second in our ‘league table’ with a rise of 27%: the Dow Jones index was up 19% in the first year of Joe Biden’s Presidency.

Returns in the Far East were much more subdued: the markets in China and Japan both rose 5% in the year, with South Korea just behind with a rise of 4%. However, Hong Kong – probably to no-one’s surprise – was the year’s biggest loser, with the Hang Seng index falling 14% in the year.

India led the way in the Emerging Markets section, with an impressive gain of 22%. Despite its poor showing in December, the Russian stock market still gained 15% in the year – but this section also brought us the year’s other big loser, with the Brazilian stock market down 12% in 2021.

And finally
It is difficult to know where to begin in the final section of our final Bulletin of 2021. December was a bumper month for ‘And finally…’ Quite possibly the best on record – although we must leave that to your judgement.

‘Shortages’ have been a constant theme throughout the year and December was no exception. First of all there was the chip shortage. No, no, not a shortage of semiconductor chips hitting car production: a simple shortage of chips.

Global supply chain problems meant that McDonald’s branches in Japan were – in simple terms – short of spuds. The company didn’t have enough potatoes to make its French fries. As a result any hungry Japanese customers who wanted a large – or even a medium – portion of fries were out of luck. Throughout December, only small portions were available, “to ensure customers can continue to enjoy McDonald’s French fries”, said the company – just not very many of them. Fortunately the month ended with three 747s full of potatoes taking off for Japan.

Away from McDonald’s problems, December was quite simply a month when a lot of people and organisations got it badly wrong.

Australian bank Westpac was fined $81m (£60.3m) with regulators insisting that the Bank ‘urgently improve its poor compliance culture’. As that ‘poor compliance culture’ apparently included continuing to levy bank charges on dead people, we can side with the regulators on this one.

Meanwhile, thousands of Santander customers woke up to a pleasant surprise on December 25th, after the bank had wrongly deposited £130m among 75,000 different accounts. It is now trying to claw back the money, but the good news is that it’s ‘proving difficult’.

Vishal Garg, the CEO of US company, gained widespread notoriety in December for firing 900 people via a mass Zoom call. Unsurprisingly it backfired spectacularly and Mr Garg was later reported to be ‘taking time off effective immediately’.

Neither was December a good month for a gentleman in Biella in north-west Italy. The man – in his 50s – wanted a Covid passport, but didn’t fancy the jab. He duly turned up with a silicone mould covering his real arm. But the nurse was not fooled, later telling local media his arm felt ‘rubbery and cold’ and the pigment was ‘far too light.’ The man is now discussing Covid with the local carabinieri…

December is traditionally a month of smiles and laughter. Not, sadly, if you were in North Korea…

Marking the 10th anniversary of former leader Kim Jong-Il’s death, a diktat decreed that ‘all citizens must mourn for 11 days’ with all instances of ‘general enjoyment’ banned during the period. These included shopping, recreation, alcohol consumption and even a ban on laughing.

Let us reassure all our clients that no such ban will be in force in our office during the coming year – a year when we hope to see far more of our clients face-to-face. We’ll therefore end the Bulletin by wishing all our clients a very happy, healthy and prosperous New Year. May 2022 bring everything you and your family would wish for.

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