Nutmeg investor update: January 2022

2021 ended on a high note for investors as markets recovered from a volatile patch. What was your take on December?  

The end of 2021 echoed the first quarter of the year as bond yields and oil prices climbed, and stock markets rallied. Much of this optimism stemmed from the US Federal Reserve signalling in mid-December that it would favour raising interest rates three times in 2022 to combat inflation. The Fed also announced that their emergency purchases of bonds – which have added liquidity since the Covid crisis – will end in March this year. 

The Bank of England was actually the first of the central banks to implement a rate rise in December, hiking its lending rate from 0.1% to 0.25%; it’s first rate rise in three years and showing policy makers are taking a tougher stance on rising inflation.  

Can you give us some broader insight into how different markets performed in 2021? 

It was a big contrast between asset classes, with government bonds falling around 5% over the year, while global equities were up over 20%. This was actually the third successive year that equities delivered double-digit growth, which is good news for portfolios that are skewed towards risk assets.  

In terms of regions, the Nordics topped the year with a 30% rise. Japan was the weakest link at 13%, while UK equities managed over 17%. 

Emerging market equities largely underperformed their developed market peers. The prospect of central bank’s ending their quantitative easing and higher cash rate policy suggests more adverse liquidity conditions for these developing nations.  

Another way many emerging markets source liquidity is via commodity sales, and commodity prices rose across the board in December even if that only partially unwound a calamitous October and November. Still, the net liquidity picture looks weak for emerging markets. And while the rapid spread of the Omicron variant seems to show Covid-19 has peaked, these countries will continue to suffer under its aggressive infection rate.  

With this in mind, in December we made the decision to trim our exposure to emerging market equities and put those proceeds to work in Nordic equities where we have more confidence of growth, and also in cash ready to take advantage of future investment opportunities. 

How did the Nutmeg fully managed portfolios perform during the month of December? 

We benefited from buoyancy of risk assets in the second half of the month. Gains were very marginal for our lower risk portfolios; between flat and 0.5% for portfolios 1-3. The typical medium-risk portfolio (portfolio 6) grew around 1.5%, and our most adventurous portfolios (risk levels 9-10) grew 2.7% during the month.  

Our Socially Responsible Portfolios meanwhile were essentially flat in the lowest risk portfolios, up around 1.5% in medium risk and with gains of 2.4% in the highest risk option.  

In December it was reported that UK inflation reached 5.1% in the year to November, while in the US CPI climbed even higher to 6.8%. How concerned are you about ongoing price rises? 

We’ve spoken before about supply bottlenecks as manufacturers have struggled to meet demand after the lockdowns. To manufacture a car or mobile phone, for example, requires many different parts and suppliers and shortages lead to price rises. These bottlenecks are likely to remain throughout 2022, though we are now seeing signs that some constraints are easing, such as falling shipping container rates.  

We think inflation is therefore likely to peak at some point during this year as the global economy opens up. On a cyclical basis, central banks are on the right track in raising interest rates to dampen price rises.  

We are noticing that the US is becoming less reliant on China imports. Historically, China imports have kept inflation low. Now that we are living through a reset on China-US relations, it will be interesting to see what impact this has on US inflation; indeed on how the US economy adjusts to the new environment.  

President Trump’s tariff policy may be partly reversed if President Biden eases some trade restrictions on China such as industrials, metals, and consumer tech. This would ultimately ease upward price pressure. 

What are some other big trends that you think will influence markets in 2022? 

Obviously, the recent spread of Omicron and other COVID-19 variants is a huge concern and further lockdowns would be a blow to businesses and economies which are desperate to get back to full capacity. Beyond this, there are other key themes, such as inflation, globalisation, stimulus, the flourishing world of SRI investing, and growth of passive investing, which we think will continue into 2022.  

We’ve written about these in our 2022 investment outlook, which can be found on the Nutmeg website, and we would recommend clients look at this if they are interested in reading more of our views on each of these themes.  

Overall, we continue to take a positive view on developed market equities and risk assets as economies normalise. But that very normalisation is continued bad news for bond markets – at least until central banks get further into their tightening cycle in 2022. 

The Nutmeg investor update is available as a podcast, listen to this month’s update below.