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Our views 07 December 2021

The Viewpoint: 12 Days of Christmas markets

5 min read

During the festive season, it’s natural to spend time with our nearest and dearest, enjoy Christmas activities, and reflect on the year as it draws to a close.

2021 has been an action-packed year for financial markets. As world economies emerged from Covid-induced lockdowns following widespread vaccination programmes, markets took their time to establish a new normal. There were winners and losers.

As its almost Christmas, I thought it would be apt to review some of the key significant trends/themes of 2021.

Let’s have a look.

1. Innovation like never before

Low interest rates have continued to fund extraordinary areas of innovation that will change the world for years to come, fuelling the disruption. New biosciences, revolutions in medical drug design, the emergence of 5G and high-speed computer applications like Omniverse and Metaverse have been prominent this year. We’ll all be hearing the term Metaverse a lot more in 2022!

2. Equity market valuations – it’s been the best of times and the worst of times

Equities are very expensive relative to historic levels but also relatively attractively valued versus cash and fixed income. It’s a real conundrum for investors – equities are both a bad deal but a great deal depending on your reference point.

3. ESG investing isn’t black and white

Unless carbon intensive industries are tackled, decarbonisation does not occur to anything approaching a significant enough extent to avert a climate catastrophe. For investors, that means embracing companies in transition.

4. EM submerged again

The first 10 years of my career saw emerging market equites consistently outperform developing market counterparts. Since 2011, the trend has reversed. The differential in valuations between EM and DM is back again to the extremes seen at the start of the millennium. The recent rout in Chinese tech stocks has helped cement this.

5. The end of the conglomerate

In the digital age and a world with abundant capital, it appears the conglomerate structure (lots of disparate companies under the umbrella of a central management team and management infrastructure) has become a handicap rather than an advantage.

6. Forgotten Japan

There are some hugely neglected mid-cap companies here. While there are many relatively low-quality companies in Japan in terms of profitability and returns on capital, I believe there are also lots of decent businesses which are trading at incredibly attractive long-term valuations. Many are hardly covered by analysts and it seems that in markets dominated by tech and growth stocks this is a pocket of neglected opportunities.

7. Passive funds – creating a free lunch?

This is a complex area, but there is an increasing number of corporate actions and market events creating opportunities for active managers to arbitrage passive funds who slavishly seek to track the benchmark. The fact that most passive funds track a benchmark above all else leaves them vulnerable to having to make trades that are suboptimal to total returns even if they do ensure benchmark tracking.

8. Rule Britannia… Or perhaps not

The UK has continued to underperform global equity markets. In the last five years, the MSCI Global index has risen 94% while the FTSE All-share is up a mere 34% – that’s nearly three times higher. 2021 has been another year the UK has lagged. The UK is currently priced at a significant discount to the rest of the world and has much potential to throw up some bargains for investors, we feel.

9. Record levels of index concentration

The largest 1% of companies in the 1500+ company MSCI Index make up over 22% of the index, and just 21 companies make up 25% of the index. Traditional finance would say that the larger a company gets, generally the harder it becomes to compete and so they eventually fade (diseconomies of scale). However, in the digital age, many of these companies are becoming more competitive as they get bigger (more data, a stronger network) and can keep growing at high rates even when they are very large. This is leading to index concentration not seen since the ‘Nifty Fifty’ in the 1960s and 1970s.

10. Deglobalisation

Recent geopolitical developments including trade wars, Covid disruption, and growing environmental and social concerns about supply chains have created a recent period of deglobalisation. A critical question for investors: is this a temporary phenomenon?

11. Greenflation

Increasingly prevalent in society and the supply chain. As we quite rightly seek to capture the externalities of economic activity on the environment, we are generally adding costs back into the production and consumption of goods and services, like carbon taxes. At the margin, this is driving up the price of things like energy and materials.

12. Wage inflation

A huge topic for 2022 will be whether the period of inflation we are witnessing globally leads to labour and workers demanding pay increases. In the last 12 months, especially in the UK post-Brexit, this seems to have changed dramatically. What happens next has significant impacts on society, monetary policy, consumption and corporate margins. How significant are pay rises in the next 12 months for workers and how entrenched does a new form of labour bargaining power become? An ever-increasing number of stocks and investment decisions relating to them will be influenced by this.

All in all, it’s been an eventful 2021 indeed and it will be interesting to see what the year ahead brings.

Warm seasons greetings and Merry Christmas!


Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.


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