Last year saw very good returns globally.
If we delve a bit deeper, we will see that there were only a handful of players responsible for these impressive gains. Twenty-five stocks make up 40% of the S&P 500 weighting, therefore, any movements in their share price have a significant impact on funds that are invested into global portfolios.
Last year wasn’t without significant headwinds. In China we saw regulatory crackdowns which impacted tech giants such as Alibaba and Tencent. There were global supply chain bottlenecks and energy and labour shortages which created significant disruption in the market. Towards the end of 2021 we saw markets respond to the US Federal Reserve’s threat of tapering.
Locally the JSE performed well but this was mainly on the back of strong commodity prices. SA Inc continues to struggle with high unemployment, poor education, low vaccine rollout and a lack of consistent energy supply.
It’s safe to say the bubble burst in January 2022 due to an overvaluation of US stocks by as much as 40%. We thought the worst was over as we saw the NASDAQ drop 16% YTD on the back of US inflation, yet now we have Russia’s invasion of Ukraine impacting global markets negatively. This has prompted the sell-off of growth stocks (big tech) into the more boring yet favourable value stocks (consumer staples) which tend to do better in times of inflation. With strong vaccine rollouts and lockdowns subsiding in developed markets we can see those sectors that were dampened by the pandemic such as leisure, travel and entertainment start to flourish again, providing further opportunities going into 2022.
Emerging markets, excluding China, have set up a strong base from which to grow over the last year. In China internet stocks Alibaba and Tencent are starting to form a good base from which to start growing again. We have seen equity flows into value regions such as China and emerging markets towards the end of last year into 2022, however, slowed global growth and rising inflation could have negative impacts for emerging markets going forward.
SA Inc has done well the past year and remains strong heading into 2022. The MSCI SA is up 13.7% YTD compared to 0.74% average for emerging markets, however, food price inflation and the Russia conflict is expected to impact South Africa negatively.
Commodities are coming off a strong 2021, we may see the burgeoning of the next commodities super-cycle, the last of which ended after the 2008 Beijing Olympics. Oil risk is on the upside to $100-$120 per barrel and at time of writing Russia began its invasion of Ukraine sending oil above $100/barrel. The rand/dollar exchange rate remains a neutral outlook and is expected to trade sideways going into 2022.
In summary 2022 will be a year of extreme volatility and the smart money will go into emerging markets, commodities, value stocks and gold. For insightful, trusted guidance on where you should invest your well earned money, speak to your Edge IFA for further independent advice to help you navigate these uncertain times.
Contact Leon Petzer at Leon@edgewealth.co.za