Investment Commentary Q4 2021

Investment commentary Archives

In Brief

  • Q4 2021 saw gains for US and European equities based on strong earnings but falls for Asian and emerging market equities in sterling terms. It was broadly neutral for bonds despite some volatility.
  • Inflation continued surprising to the upside during the quarter, although central banks initially remained relatively sanguine, supporting Western equity markets.
  • The arrival of the new COVID variant, Omicron, failed to dent markets significantly during the quarter.

Quarter Overview

October was broadly positive for markets. Q3 earnings season in the US boosted the stock market, with over 80% of companies beating expectations. Economic growth remained solid as vaccine rollout continued, with restrictions lifted in many countries. The month also saw several challenges: supply constraints, rising energy prices, higher inflation, and nervousness around future COVID-related restrictions in some other countries.

November saw a sell-off in its final week as a new COVID variant (Omicron) was discovered in Africa. Given the uncertainties of the variant, many countries swiftly reintroduced travel restrictions. Even before this, mainland Europe was struggling with its fourth COVID wave, with hospitalisations reaching concerning levels. Inflation continued to surge upwards, driven by rising energy prices and supply shortages. The COP26 climate meeting in Glasgow concluded with mixed success.

December saw more positive market sentiment despite Omicron cases in the UK and the US rising sharply during the month. Data emerged to suggest that, despite its infectiousness, Omicron symptoms and, thus, risk of more severe health issues were much lower than previous variants. Inflation continued to push upward across almost all major economies. This finally prompted many central banks to take action in the form of rate hikes and/or announcing the accelerated tapering of bond buying programmes, including in the US, UK and Europe. Bond markets were slightly surprised by this, and as a result, fixed-income yields rose over the month, and bond prices fell.

Overall, the fourth quarter saw an extremely strong market performance from Western developed equity markets based on expectation-beating corporate profit upgrades, with the US leading the way. Asian equities and emerging markets struggled on the back of continued Chinese economic weakness, however. Bond performance was also subdued during the quarter. Market volatility, as measured by the VIX index, fell almost 26% over the quarter. Developed market equities (measured by the MSCI World Index, including dividends) were up 7% in sterling terms over the quarter. The FTSE 100 returned almost 5% over the quarter, including dividends. Emerging market equities (MSCI EM Index) fell almost 2% over Q4. Global bond yields were roughly flat over the quarter, with higher quality bonds as a whole (as measured by the Bloomberg Global Aggregate Index) also flat over Q4. Lower quality ‘high yield’ bonds fell slightly (-0.5%) over the quarter. Energy commodities retreated over the quarter, with oil falling 0.9%. Gold rose 4.1% over the quarter.

investment Asset Class Returns 2021

Data source: Financial Express
Indices used (including interest & dividends): Defensive Investment Grade Bonds – GBP hedged Bloomberg Global Aggregate Index; Riskier Bonds (High Yield) – GBP hedged Bloomberg Global High Yield Index, Developed World Equities – MSCI World Index in GBP; Emerging Market Equities – MSCI Emerging Markets Index in GBP; FTSE 100 (UK Large Capitalisation Equities)

Diving into stylistic performance within indices, ‘high price’ securities (often described as growth, momentum and quality companies) continued their stronger second-quarter run, up almost 8% over Q4. Cheaper ‘value’ companies weren’t too far behind, up nearly 7%. Smaller companies, however, lagged significantly, only up under 2% over the quarter.

investment style returns 2021

Data source: Financial Express
Indices used (including interest & dividends): Developed World Equities – MSCI World Index in GBP; Growth Equities – MSCI The World Growth Index; Value Equities – MSCI World Value Index; Small Company Equities – MSCI World Small Cap Index

The pound had a more robust quarter, up 0.4% against the US dollar, 3.9% against the yen and 2.2% against the euro.

Portfolio Performance Overview

The PortfolioMetrix Core portfolios had a subdued quarter. Asset allocation was a headwind due to a relative underweight to strongly performing US equities and a relative overweight to weakly performing Japanese and emerging market equities. Active fund performance also detracted over the quarter. However, Full-year performance was stronger than full-year active performance, which added about 0.5% for mid-risk portfolios.

Sustainable World portfolios had a weaker quarter, with their tilt away from larger companies and slight tilt towards emerging markets both detracting. The full year’s relative performance was weaker than in 2020. However, they continue to enjoy significant long-term structural drivers as the world shifts to focus more on environmental and social issues.

Looking Forward

As we move from 2021 to 2022, market concerns over COVID-19 are diminishing to replace inflation worries and fears over monetary tightening by central banks to deal with inflation. Equities and bonds fell modestly over the first week of 2022 as investors began to price in earlier withdrawals of central bank stimulus in the form of reduced central bank bond buying and higher interest rates. Previously, high-flying tech stocks were particularly hard hit.

The inflation outlook, which roared ahead in 2021 due to supply chain disruptions and energy shortages, will likely drive market returns this year. The high recent annual inflation numbers (6.8% in the US and 5.1% in the UK in November) should come down later in 2022 as supply chain issues are resolved and due to base effects (2022 inflation will compare against higher 2021 prices rather than lower 2020 ones). The critical questions for 2022 are: ‘by how much?’ and ‘how quickly?’.

investment commentary headline inflation
Source: J.P. Morgan Asset Management Guide to the Markets Q1 2022

Slower falls in inflation than expected risk are becoming embedded at higher levels than the 2% targets of central banks as employees start demanding higher wages to offset inflation, and companies start charging more to offset higher wages and other input costs. Some worries increasing rental costs in the US (a significant component of CPI) could also lead to higher-than-expected inflation. This situation would require central banks to be more aggressive with their interest rate rises and quantitative tightening (selling bonds previously bought under quantitative easing), which would almost certainly be negative for bonds. Equities could also suffer in such a scenario, although their outlook would depend on growth levels.

Strong global growth and being inflationary would at least support equity prices through higher corporate profits. The worry is that overly aggressive central bank monetary tightening could choke off growth as debt (government, corporate and household) becomes more expensive. Global total debt levels have mushroomed since the global financial crisis and COVID-19 (the Institute of International Finance measured this at over 350% of global GDP from 320% pre-COVID), so the global economy is more sensitive to higher rates than it used to be.

On the other hand, faster-than-forecasted falls in inflation would allow central banks to be less aggressive in raising rates, which would likely support bonds and other asset prices, as long as the reason for inflation falls wasn’t a downturn in global growth.

Thus, inflation is perhaps the key macroeconomic indicator to watch in 2022, but don’t forget to watch growth figures, too. Forecasts for these are undoubtedly healthy. The IMF expects 4-5% growth levels for 2022 for the US, UK, and Europe—far more than pre-COVID levels, which averaged around 2% (although these higher levels partially catch up for the falls seen in 2020).

GDP predictions
Source: Deloitte COVID-19 Economics Monitor, 5 January 2022

There are, of course, risks to current generally rosy growth levels. COVID certainly isn’t going to go away entirely, with the best-case being Omicron marks the beginning of the disease becoming quickly endemic and no more severe than flu (although note that this doesn’t mean harmless – the World Health Organisation estimates up to 650 000 people die globally each year due to flu complications). Whilst becoming endemic is the likely long-term outcome for COVID, there could still be bumps in the road on the way there in the form of new variants that cause further economic disruption. That said, the current trend on COVID is positive – despite Omicron, global daily deaths are roughly half that of last (Northern Hemisphere) winter.

investment deals
Source: Financial Times,, accessed 11 January 2020

Another risk to global growth is China, which is currently cracking down on overheating in its systemically important property sector. The high debt levels could lead to weakness in the Chinese economy. Given the size of the Chinese market for goods and, in particular, commodities, weakness could easily negatively impact global growth.

And when it comes to risks, don’t forget geopolitics. Russian troops are currently massing at the border of Ukraine, possibly in preparation for an invasion, which could disrupt energy supplies to Europe, given Russia’s importance as an exporter of natural gas and oil (as well as many other commodities). The Chinese military has also recently stepped up its testing of Taiwan’s defences, possibly in preparation for an invasion (Taiwan, through national champion TSMC, is one of the largest suppliers of the microchips used in cars and most everything else nowadays). In addition, a new nuclear deal with Iran is proving challenging to negotiate, with higher oil prices reminding the world that the Middle East remains extremely important to the world economy. All of these situations have the potential to flare up in 2022 with dramatic effect.

Despite these risks, we are cautiously optimistic about our portfolios. Given inflation, it remains challenging to make an attractive case for cash and bonds from a returns perspective, although they remain crucial for diversification and portfolio control. The case for equities is stronger as expectations for company earnings growth remain robust this year and next.

earnings growth
Source: J.P. Morgan Asset Management Guide to the Markets Q1 2022

That said, valuations are a challenge for some regions in absolute terms, particularly US equities. However, compared to bonds (comparing equity earnings and dividend yields relative to bond yields), US equities look reasonably valued based on historical ranges.

investment GLobal PE Ratios

We continue to favour a balance of equities in portfolios for growth, albeit tilted away from more expensive parts of the market like the US and towards cheaper parts like the UK, Japan and Emerging Markets. For most clients, holding some bonds and cash remains helpful in controlling risk and in case of the unexpected. We also continue to diversify portfolios as much as possible through the judicious use of less mainstream asset classes like high-yield bonds, emerging market bonds, listed property and infrastructure.

Data: Monetary Policy* (Rates & Extraordinary Measures)

A few developed market central banks, including the Bank of England, joined emerging market central banks in raising interest rates to combat inflation. In addition, the US Federal Reserve and ECB also started tapering their bond purchases as a prelude to likely raising interest rates sooner than markets had anticipated.

global monetary rates

Data: Global Economies

GDP figures released in the fourth quarter were for Q3 2021 and continue to be volatile, given different patterns of COVID disruption and government support. They generally show reasonable growth, though. Inflation increased almost universally during the fourth quarter, while unemployment generally fell as restrictions were lifted and economies continued recovering.

investment commentary

Data: Asset Classes

It was a strong quarter and year for Western developed market equities, but Japanese equities in pound terms were subdued, and emerging markets fell. Commodities paused for the quarter but had a solid year overall, mainly fuelled by gains in the energy complex, particularly natural gas. Globally listed property and infrastructure also performed well over the year.

Bonds struggled overall in the fourth quarter and year as global interest rates rose. Inflation-linked bonds performed well; however, they benefitted from increased inflation fears.

asset class performance
asset classes

Note: The above are total returns, including dividends and interest payments. Asset classes with the “HDG” label are currency hedged to pounds sterling, meaning foreign currency movements are removed. Those with the “£” label indicate that we are reporting returns to British holders, which includes the effects of the foreign currency moves non-UK listed securities are exposed to.

Data source: Financial Express

Indices used: 3m GBP LIBOR, GBP hedged version of FTSE World Government Bond Index, GBP hedged version of FTSE WorldBIG Corporate Index, GBP hedged Bloomberg Global High Yield Index, GBP hedged version of FTSE Global Emerging Markets US Dollar Government Bond Index, MSCI North American Index, MSCI Europe ex-UK Index, FTSE All Share Index, MSCI Japan Index, MSCI Pacific ex-Japan Index, MSCI EM Index, FTSE Global Core Infrastructure 50/50 Index,  FTSE EPRA NAREIT Global Index and S&P Goldman Sachs Commodity Index

Data: Indices, commodities, Currencies

indices performance


The FTSE 100 index is the 100 largest companies by market capitalisation listed on the London Stock Exchange. Crucially, while these companies are priced in sterling, most of their revenues come from outside the UK, making the FTSE 100 more of a global than domestic UK index.

MSCI World Index is used to gauge global developed market equity performance. This is heavily influenced by US equity performance, which, as the world’s biggest equity market, makes up more than half of the index. This is not to be confused with the MSCI All-Country World Index, which includes developed and emerging market equities.

MSCI Emerging Market Index measures emerging market equity performance.

Bloomberg Global Aggregate Index represents global investment-grade bond markets, mostly made up of government bonds.

Chicago Board Options Exchange Volatility Index (VIX) measures implied volatility in the S&P 500 Index (how volatile market participants expect big US equities to be/how risky they view them to be). It is also known as the “fear index,” with higher numbers crudely representing “more fear” in markets and lower numbers crudely representing “more greed.”

Brent Crude Oil prices are a key indicator of movements in the global oil market. Oil is the world’s most important commodity as it is an important input into economic activity (providing energy and as a raw material in producing materials such as plastics).

Data Source: PortfolioMetrix, Bloomberg

*Glossary of Financial Terms

Hedging back to sterling: Currency fluctuations can be eliminated by “hedging” the foreign currency back to the pound. In this way, a UK investor holding a US government bond or bond fund would not experience changes to the pound-to-US dollar exchange rate, and their holding would be much less volatile/risky.

High yield: High-yield debt is rated below investment grade and is riskier. Its higher yield compensates for this additional risk.

Monetary Policy: The decisions central banks make to influence the money supply in an economy, primarily the setting of base rates, but also through specific extraordinary measures such as quantitative easing.

Quantitative easing: Quantitative easing refers to expansionary efforts by central banks to help increase the money supply in the economy (and help indirectly lift the economy). It involves the central bank purchasing financial assets, mainly government bonds.

Quantitative tightening: A mechanism for decreasing the money supply in the economy to cool excess growth (above a stable level). It involves the central bank allowing purchased bonds to mature or, in extreme cases, selling previously purchased financial assets.

Quarterly vs annualised growth rates: Some national statistical agencies prefer to quote country growth levels in a quarter as an actual quarterly rate (the estimate of growth over three months, x, sometimes referred to as “on-quarter” growth), whilst others prefer to quote the growth over the quarter on an annualised basis (i.e. assume the growth over three months continued for a year, approximately 4x). Unless specified otherwise, we quote only annualised rates using actual calculations rather than the simplified approximation of annual rate = 4 x quarterly rate.

This document is only for professional financial advisers, their clients, and their prospective clients. The information given here is for information purposes only and is not intended to constitute financial, legal, tax, investment, or other professional advice. It should not be relied upon as such, and PortfolioMetrix cannot accept any liability for loss for doing so. Any forecasts, expected future returns or expected future volatilities are not guaranteed and should not be relied upon. The value of investments and their income can go down and up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future performance. Portfolio holdings and asset allocation can change at any time without notice. PortfolioMetrix Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. Full calculation methodology available on request.

Author Info

Graham Bond
Graham Bond
Financial Adviser - Business Owner

With 35+ years in financial services, Graham specialises in retirement planning, investment strategies, and tax planning. His expertise ensures clients secure their financial futures through tailored advice and strategic planning.

Latest Posts

Get in touch

Book an introductory call with one of our planners to discuss what’s important to you…

Fill out our callback form, and one of our local advisors will contact you at a convenient time.