European markets

Wow, what a year we had in 2021! It had a strong start; drifted sideways; came down; and then ended strong again. It was a roller coaster year dominated by Covid-19; but eventually equity markets outperformed everything else out there. At year-end, the JSE was up 24% and the S&P500 was up 28%. Most European markets did reasonably well with the only big negative Hong Kong with -14%. Cash gave you around 4% with inflation at 5,5% – so not a good place to have your money over the long term. Local bonds performed well but US bonds did not. It must be said that, although the overall indices performed well, there were some pockets of shares that did not, locally and internationally. Naspers, for example, gave you -18% and Disney in the USA -14%. It was clearly a year in which you could have underperformed if stock-picking was your game and you made some wrong choices.

Going forward we have to expect some of the hospitality and travel companies to perform well as things return to normal. Technology and Biotech companies were the best-performing sectors over the past two years but their valuations are now elevated, so if vaccinations pick up and Covid variants become milder, we might see a rotation out of tech into leisure. As South African investors we had a 9% sweetener on our international investments due to a 9% depreciation of the our rand against the US$. Once again this makes the rand undervalued and we could see it return to around R14/$ if our fundamentals improve, but we all know that predicting the level of a currency is a fool’s game.

We can expect inflation and interest rates to go up in 2022 and this will be negative for most equity investments, especially those with a lot of debt and high valuations. The FAANG stocks could be part of the group of underperformers but Banks should benefit from higher rates. Although the JSE should still provide you with a decent return due to its 5-year average underperformance, 2021 would most probably not be repeated. The biggest disappointment in 2021 was the underperformance of Emerging Market equities. The Chinese regulatory clampdown caused some big names to fall by over 70% and created a paranoia for investment in Chinese companies. International fund managers avoided anything “emerging” and chose to invest in safer areas of the market.

We can expect 2022 to continue providing us with solid equity returns, especially in those sectors that underperformed in 2020 and 2021. We should stay away from US bonds and ensure that we have enough cash to cover our shorter-term needs in case of an unexpected event. As always, we trust our fund managers to select the right companies to invest in, and we will make sure your asset allocation is in order. Let us embrace change, stay open-minded and always maintain our positive outlook.