Every year there are surprises at the trade fair, although there seem to have been more in 2021. A surprise is something that the vast majority did not expect. That is the reason why surprises can set a stock market in motion. When almost everyone is convinced of something, it is discounted in the stock prices. These were the biggest surprises of 2021.
Decoupling interest rates from inflation
By far the biggest surprise of 2021 is the decoupling between rising inflation and low interest rates. In the United States, inflation stands at 6.8 per cent, while the 10-year interest rate does not exceed 1.5 per cent. In the eurozone, inflation is at 4.9% and the German ten-year rate is at -0.25%. That means negative real interest rates of more than 5% in both cases. Last year it was predicted several times that interest rates would rise quickly, but rising inflation and even a turn in monetary policy did not get them moving. There are simply too many buyers who buy bonds because they have to, not because of the yield.
Profits rise stronger than the stock market
Corporate profits rose stronger than the stock market in 2021. This means that despite a price rise of more than 25 per cent, the stock market has become cheaper. This is partly due to a favourable basis of comparison, but also compared to the pre-Covid year of 2019, profits are rising much more strongly than the economy is growing. Margins are higher, share repurchases are back in full swing and companies know how to adapt. Furthermore, companies are ideally able to pass on higher prices, only those firms which consume a lot of energy or employ a lot of staff are seeing the need to be cautious about it.
Sustainable shares perform better for the third year in a row
Since the presentation of the Sustainable Development Goals in 2016, it can be said that SRI has gone mainstream. Last year, sustainable companies outperformed the rest of the stock market by an average of 5 per cent, the same as in 2020. Yet this is a surprise because by the end of 2020, there had been some hype around alternative energy, culminating in Tesla’s inclusion in the S&P 500. Moreover, oil companies and banks are among the best performing stocks of 2021, and they are not exactly the most sustainable companies. This is a direct consequence of the money flowing into sustainable portfolios, a trend that has only just begun.
Unprecedented chaos in supply chains
Strong demand for electronics as a result of the coronavirus crisis, fuelled by the liquidity of central bankers and the government, led to a shortage of semiconductors in the second half of 2020. Today, between 1400 and 1500 chips go into a car. That is no less than 15 per cent of world production. The lack of such a small component can have far-reaching consequences. More and more supply chains are facing delays, further exacerbated by a shortage of personnel. It is a logistical nightmare with many containers, ships and trains in the wrong place at the wrong time. Just-in-time became just-in-case and only in the course of 2022 can we expect a cautious improvement.
People stop working
One consequence of the coronavirus crisis is that people are less inclined to go back to work. The baby-boom generation is taking the opportunity to retire earlier. In addition, there are people who prefer not to go to work because of Covid, made possible by government income support. The millennial generation is also becoming a larger part of the working population. There, work does not come first. They are particularly attached to the four-day working week with the aim of enjoying retirement at the age of 55. In Europe, 1 in 3 employees is considering quitting their job, also because they want to continue selling content (influencers) and stuff (ecommerce) independently. More than 10 percent of millennials also think they can make a living from trading crypto-currencies in the future.
Oil price rises, oil investments do not
The price of oil has risen above $80 a barrel this year. At that level, one would expect that there would be plenty of investment in the extraction of even more oil. Yet this is not the case. Activists, investors, governments, commercial banks, central banks and even the courts are preventing the oil industry from investing. The result will be that next year there will be more demand for oil than supply. That will be for the first time in history. We still consume almost 100 million barrels a day and renewable energy is not visible in this statistic. A further rise in the price of oil is obvious and that is good for the popularity of alternative energy.
No significant correction
Despite widespread fears of a sharp correction in the stock market at the beginning of 2021, the largest correction in 2021 was limited to around five per cent. Many stock exchanges ended the year at record levels. There are still plenty of forecasters who believe that the stock market can rise further next year, but who also point to the increased risk of a correction. Corrections are part and parcel of investing in shares - they keep speculation in check. A healthy rising stock market climbs a wall of fear. It is only dangerous when nobody predicts a correction any more.
China-US relationship further polarised
One of the differences between Obama and Trump was Trump’s much tougher stance towards China. As Biden was previously vice-president under Obama, it was not expected that Biden would embrace Trump’s policies, but that turns out to have been the case. Trump’s trade sanctions against China are still standing, despite the fact that they are directly causing inflation to rise in the United States. The strong US economy meant there was room for such a hard line. It is possible that there will only be room for relaxation next year.
Chinese bonds beat Chinese equities
In the first six weeks of 2020, the Chinese stock market started well, but the peak coincided with the start of the Chinese New Year. The waning credit impulse paralleled the peak in economic growth. Moreover, China took advantage of the strong growth in the world economy and the record export figures to put its house in order. China decided to take some short-term pain through more regulation in order to optimise economic growth in the longer term. The measures taken are mainly in the interest of Chinese consumers and therefore also in the interest of investors. Chinese government bonds have gained more than 10 per cent this year, and are nevertheless still an attractive investment.
Large rotation from bonds to equities
This rotation has been predicted several times this century, but has never materialised. A year ago, nobody saw it coming, but suddenly it has happened. More money has flowed into the stock market in the past year than in the past 19 years. Finally, the search for yield has ended and the money is flowing into the stock market. Considering all the money that has gone into the bond market in recent years, 2021 is only the beginning. Gradually, more and more investors seem convinced that equities will be a much better alternative to bonds in the coming years. Such rotations usually do not stop at the end of the year.
Han Dieperink is an independent investor, consultant and knowledge expert for Fondsnieuws, Investment Officer Luxembourg’s sister publication. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co. He is currently active as chief commercial officer at Auréus Asset Management. Dieperink provides his analysis and commentary on the economy and markets.