Russell Harrop, Head of International Equities and James Follows, Head of UK Equities
At first glance, the extremely strong performance of the US equity market continued into Q4 2021. The S&P 500 Index and the technology-heavy Nasdaq Index both rose 11%. Specifically, the companies that performed most strongly pre-pandemic have continued to do so during the pandemic. The S&P information technology sector led the way, rising 16%. Meanwhile, the previously ignored materials sector was only one percentage point behind as investors started to think that inflation might stay a little longer. However, beneath the surface performance was more concentrated than it has been. While both Netflix and Amazon saw their share prices rise considerably in 2020, more recently they have languished. In Q4 2021, Amazon’s share price rose just 1%, while Netflix’s share price fell 1%. Alphabet, parent company of Google had a stellar 2021 in rising 65%, though its 9% performance in Q4 lagged the sector and the index. The really big action, however, was even more concentrated. The world’s largest company by market capitalisation, Apple, rose an astonishing 25% during the fourth quarter. Indeed, the $574bn in market capitalisation it added during the quarter was more than its entire market capitalisation only five years ago! Electric vehicle pioneer, Tesla, rose more than a third too, adding $285bn to its value; nearly two Royal Dutch Shells.
Surprisingly, given all the talk on inflation, the financials sector in the US rose only 4% during the quarter, with megabank JP Morgan falling 4%, though it still rose more than a quarter over the year. Competitor, Bank of America, added nearly 50% to its market capitalisation in 2021; this $100bn increase would buy you two Lloyds Banks, with $10bn of spending money for treats left over.
Once more, the MSCI Europe lagged US indices, though a 7% quarterly return is nothing to be sniffed at. Meanwhile over in Japan, tightening of COVID-19 restrictions and the closing of borders hampered share prices, with the Topix Index ending the quarter 2% lower. This is despite the positive impact provided by a 4% weakening of the Yen against the dollar. Both the Shenzhen and Shanghai Chinese indices eked out 2% gains as the government’s action against US listed Chinese companies affected sentiment, even domestically.
We continue to focus on well managed businesses, with sensibly managed balance sheets that can compound away whatever slings and arrows are thrown at equity markets in the coming year.
Year-end market capitalisation of Apple, Tesla, JP Morgan, Bank of America, Shell and Lloyds Bank
Source: Bloomberg, LGT Vestra
In 2021, UK stocks posted their biggest annual rise since 2016. The FTSE 100 Index rose by 14% and the FTSE 250 by 15%. With the addition of dividends, this translated into an FTSE All-Share Index total return of 18%. Consequently, the FTSE 100 Index has retraced its pandemic losses. Over the last quarter, the dispersion of returns within the index has been relatively broad. Energy and financial sectors lagged during the quarter but led the index over the year. Reopening sectors, such as travel and leisure, saw initial interest which faded towards the end of the year as the new Omicron variant weighed heavily on activity.
The FTSE All-Share index has recovered its pandemic losses
Source: Bloomberg, LGT Vestra
Nevertheless, as we have previously highlighted, the UK equity market continues to trade on a low relative valuation, and UK companies have seen a number of bids from overseas investors.
The cyclical aspect of the UK is often cited as the reason for its relative cheapness. However, as the chart below shows, the UK still trades at a discount to the global market. As a result, it would not surprise if bargain hunting by overseas predators proved to be one of the defining features of the market in 2022.
The UK equity market remains cheap relative to global equity markets
Source: Bloomberg, LGT Vestra
Note: A ratio above one means the MSCI UK Index trades at a valuation more expensive than that of the MSCI World Index; a ratio below one means the MSCI UK Index trades at a valuation less expensive than that of the MSCI World Index; and a ratio equal to one means the MSCI UK Index trades at a valuation equal to that of the MSCI World Index
General enthusiasm for the UK market will depend on robust global growth and easing cross-border tensions, rather than just domestic factors. A shortage of workers, driven by a rise in infections, may weigh on activity but is unlikely to have a longer lasting impact. Despite continued, albeit moderating, impact from the pandemic, the BoE has decided to look through this and start increasing interest rates. They are expected to increase rates at a moderate pace, with inflation pressures likely peaking in the first half of the year. Higher interest rates will provide support to the banking sector, but the impact on consumption remains to be seen with squeezed real incomes. How these counterbalancing factors play out will heavily affect market gyrations between value and growth sectors.
We see value in a number of stocks, with UK equities looking cheap relative to other leading stock markets, and continue to see sense in owning a balanced basket of companies with sensible balance sheets and good prospects. The pandemic resulted in some high-profile dividend cuts in 2020, but as the impact on profits was not sustained, a number of large UK companies felt confident enough to increase their payments to shareholders last year. This meant that dividends proved to be a useful component of total returns in 2021 and is likely to continue to do so. Given the lack of returns available from savings accounts, gilts etc., we would not be surprised to see 2022 hallmarked by investors’ ‘hunt for yield’.
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