Economics & Markets

Monthly market update - December 2021

By Michael Gray
Head of Investments NZ New Zealand

Drivers of investment performance

  • Global sharemarkets finished 2021 on a sound note, rising 4.0% over the final month of the year. This capped off a strong year for global sharemarkets, as they returned 24.2% in 2021.
  • Sharemarkets globally started December on a weaker tone due to rising Covid-19 cases, driven by the new and more contagious Omicron variant and a pivot by the US Federal Reserve (the Fed) that they would accelerate the rate at which they are tightening their policy positions.
  • Global sharemarkets recovered over the second half of December as investors became more reassured that global economic growth would not be derailed by the surge in virus cases.
  • The spread of Omicron has been a key focus for financial markets over recent weeks. Based on the evidence to date, Omicron is more contagious than Delta and the vaccines provide a lower level of protection against the latest variant. However, it also appears the severity of illness and hospitalisation rates are lower with Omicron compared to Delta, and vaccine efficiency can be improved with a booster shot. Nevertheless, despite being less severe, the volume of virus cases combined with the likely hospitalisation rate has the potential to overwhelm health systems.
  • Global virus cases have spiked to record highs, surpassing levels experienced in the three previous global virus cases waves. Record daily virus cases have been recorded in many countries, most notably in the US and some European countries.
  • Despite the rise in virus cases, governments have been reluctant to reintroduce strict lockdown measures. Although there have been some restrictions put in place, particularly in parts of Europe, financial market participants anticipate the global economy is still on track to grow at an above trend rate over the course of 2022.
  • The US Fed rattled markets in early December. They now see inflation as being broader-based rather than transitory. In addition, the Fed have signalled an earlier end to their security purchasing programme which is now expected to end in March 2022, three months earlier than previously anticipated.
  • The Fed is also forecast to commence interest rate increases in 2022. Lift-off is likely to be June, with up to three 0.25% interest rate increases possible during the year.
  • The Bank of England surprised by increasing their bank rate by 0.25% in December, despite the uncertainty introduced by Omicron and the tightening of Covid restrictions in the UK.
  • Economic data was supportive of global sharemarkets last month, particularly the strength of the US service sector. Although weaker, measures of manufacturing activity globally have been firmer than forecast and point to ongoing robust activity within manufacturing in the months ahead. The US labour market continues to strengthen – initial jobless claims are down to levels not seen since 1969 and the number of job openings in America are at all-time highs.
  • Inflation remains elevated around the world. In the US, core inflation was up 0.5% in November, taking annual inflation to 4.9% – a 30-year high. Driving inflation higher was shelter inflation (eg rents and costs of owning a home) and another jump in the prices of durable goods impacted by temporary shortages. Used cars, hotels, new cars and transportation services are much stronger than usual on a year-on-year basis, boosted by supply constraints and base effects. Used car auction prices are 57% above the pre-pandemic level.
  • New Zealand’s economy contracted 3.7% over the third quarter of 2021, reflecting the economic impact of going into a nationwide lockdown last August. Although this outcome was better than the 7.0% widely expected, the impact of Auckland’s extended lockdown won’t be evident until the reporting of the December quarter’s economic activity number.

Market performance

  • European equities outperformed last month, returning 5.8%. This compares to solid gains from the US and UK of 4.4% and 4.6% respectively. The US sharemarket ended the year just off historical highs. Over the last twelve months, the US, UK, and European sharemarkets have returned 26.9%, 14.3% and 21.0% respectively.
  • Global property and infrastructure outperformed the broader market in December, returning 8.8% and 5.6% respectively. Their annual returns are 37.4% and 9.1%.
  • Although posting a respectable 1.2% in December, emerging markets continued to underperform developed markets. Over the last year emerging markets have fallen -2.3%. The impact of Covid-19 has been greater on the emerging market economies and this has been reflected in the performance of sharemarkets. Rising interest rates due to high levels of inflation have also negatively impacted on some emerging markets throughout the year.
  • The New Zealand sharemarket fell -0.4% last year, including a 2.5% increase in December 2021. A dramatic increase in interest rates and several company specific issues have held back the domestic sharemarket over the last twelve months.
  • The increase in local interest rates resulted in the New Zealand Government Bond Index falling – 6.2% over 2021. Stronger-than-expected economic data, rising inflation and interest rate increases by the Reserve Bank of New Zealand have driven local interest rates higher. The New Zealand Government Bond Index returned 0.55% in December as longer dated interest rates drifted back after strong gains. Over the last twelve months the New Zealand 5-year Government bond has increased 183 basis points, finishing the year at 2.21%.
  • Longer dated global interest rates rose over the last month of 2021, reflecting the expectations that the US Fed will continue to tighten their policy positions over the course of 2022 and 2023. Global bonds fell -0.4% last month and have declined -1.4% over the last year.
  • Commodity prices rose in December, as measured by the Bloomberg Commodity Index, which gained 3.5%. After a period of weakness, oil (12.4%) and iron ore (14.4%) had a strong month. Over the last year the Bloomberg Commodity Index has increased 27.1%, reflecting the robust global economic backdrop.
  • The performance of the New Zealand dollar was mixed over the final month of 2021, down 0.1% on a Trade Weighted Basis (TWI). Over the month the local currency weakened against the Australian dollar (-1.6%) and British Pound (-1.4%) and was flat against the US dollar. Over the last year the New Zealand dollar fell -2.7% on a TWI basis, with most of this weakness against the US dollar, represented by a -5.0% decline.
     
  • Economics & Markets
  • Monthly Market Update
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Important notes

This article has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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