After recovering from the initial concern caused by the newest Omicron variant, December was a good month for the stock markets. We saw developed market shares (in economies such as the UK, USA, and Europe) outperforming those from the emerging markets (economies like Russia, Brazil, and Mexico), which provided measurably less, albeit positive, returns in December.
As Omicron has proved to be less harmful than previous variants, investors and the general public have been less scared of it. And while cases have increased globally, hospital admissions have remained manageable. This combination has meant that relaxed restrictions have been able to stay in place across major economies, giving investor sentiment a positive boost. However, the lag of positivity in emerging markets has predominantly come from concerns in China.
We’ve seen inflation be one of the key themes of investing this year, with supply chain issues combined with pent up demand driving higher readings across global economies. Data released last month showed that UK inflation continued to climb in November, up from 4.2% to 5.1% year on year (yoy), which means an increase in prices for goods and services. This figure caused the Bank of England to raise interest rates to try and get inflation under control, as it significantly exceeds their target of 2%.
Record levels of job vacancies in the UK have increased the possibility for further price increases, as people are likely to look for increased wages. US inflation also increased, from 6.2% to 6.8% yoy for November. Meanwhile, Eurozone inflation increased from 4.1% to 4.9%, hitting another 30-year high, on the back of surging energy costs and supply bottlenecks.
Data released in December (for November) showed that the UK’s services and manufacturing sectors maintained strong levels of growth. However, they came in slightly lower than expected when compared to the economists’ forecasts and the previous month’s figures. Given the robust growth they achieved in previous months, slightly softer numbers should not be a cause for concern as they’re already sitting at healthy levels. Despite slowing growth, the UK economy continues to positively edge its way to pre-pandemic levels, with UK unemployment falling to 4.2%, although slightly above the 3.8% 2019 pre-pandemic levels.
The Bank of England (BOE) has increased interest rates from 0.15% to 0.25%, which took the market by surprise as rising covid cases may be cause for concern for the economy. That said, officials in the UK have adopted a wait-and-see approach to decide on any new Covid restrictions to impose and will be keeping a keen eye on hospital admissions numbers. Both restrictions and interest rate hikes pose a threat to continued economic growth.
Global markets recovered strongly in the first week of December, following the dip caused by the discovery of the new Omicron variant. However, despite this initial uplift we saw a lull in the markets as investor activity slowed down in the lead up to the Christmas break.
The final third of the year had an unexpected visit from Santa, with the ‘Santa Claus rally’, seeing 2021 end on a strong note. This was helped with medical research confirming the less severe nature of the Omicron variant, the publishing of positive corporate earnings forecast for 2022, and strong consumer activity. The US (+4.36%), FTSE-100 (+4.61%), FTSE-250 (+4.27%), Europe (+5.37%), Japan (+3.49%), Emerging Markets (+1.62%) and Asia ex-Japan (+1.74%) all ended the month positively.
The performance of assets held in foreign currencies was boosted in our Plans due to Sterling’s depreciation, which we’ll discuss below.
After a difficult November, Sterling showed signs of recovery against most major currencies. The recovery in its value was driven largely by the BOE’s decision to hike interest rates but was subdued by signs of weakening growth and tightening employment conditions. Sterling rose in value against the Japanese yen (+3.35%), the US dollar (+1.72%) and the euro (+1.44%).
Investment type performance breakdown
Despite Sterling’s better performance against most major currencies, a strong rebound in global markets gave the performance of shares (+2.40%) a healthy boost. The performance of the global property sector (+3.59%) was the standout, as concerns around the severity of the Omicron variant and the Chinese property market eased. However, we did see bond prices fall (-0.90%), giving back their November gains as investors moved into riskier assets due to the fact that inflation, and therefore interest rate hikes, continued to erode the return prospects for this asset class.
Summary with Plan details
Most of our Investment Plans performed positively in December. In a reversal from the previous month, Plans with a higher allocation to shares, such as our Confident and Adventurous Plans, performed particularly well. Our Cautious Plans and our Ethical Tentative Plan delivered slightly negative returns for the month, as the greater portions of bonds reduced the positive impact of the performance of shares.
Our Investment Team continue to actively monitor the financial markets and their impact on your Plan, and as always, we are ready to act in your best interests to events as they unfold.
*Past performance is not a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.