2021 ended on a positive note with all major markets except Hong Kong and China closing comfortably in green. Nonetheless there were plenty of lingering concerns. Inflation remained a negative factor for investor sentiment in December, reaching the highest level since June 1982 at 6,9%. This in part prompted the Fed to accelerate the reduction of its asset purchases from $15 billion per month to $30 billion per month. The Fed no longer described inflation as »transitory«, saying instead that supply chain issues have continued to contribute to high inflation. Consequently is it also expected that te FED may begin raising its interest rate sooner than previously anticipated in 2022.

On the political side, a crisis over raising the US debt ceiling was averted in December. In contrast, the Biden administration's $1.17 trillion stimulus package suffered a major setback after Democratic Senator Manchin refused to support the bill. Also COVID is still wreaking havoc worldwide with the new variant Omicron leading the number of new infections. However studies have shown that people infected with Omicron are less likely to be hospitalized and the US even shortened its isolation policy for COVID-infected people. This provided some relief that new measures may not be put in place. 

Meanwhile in Europe the ECB confirmed that it will end its net asset purchases under the Pandemic Purchase Program ("PPP") in March 2022, but at the same time it will increase regular purchases under the Asset Purchase Program ("APP"). Although combined it still results in a significant reduction in monetary support. The inflation forecast for 2022 on the other hand nearly doubled from 1,7% to 3,2%. Meanwhile the Bank of England and the Norwegian Central Bank were the first central banks to raise their interest rates in order to combat inflation.

US indices closed positive with the S&P500 gaining 4,36%, the Dow Jones 5,38% and the Nasdaq Composite adding a modest 0,69% as technology stocks underperformed other industry sectors. Despite the accelerated tapering by the FED, the dollar was nearly unchanged against the Euro and closed at 1,1368.

In Europe the Dax, CAC and Eurostoxx gained 5,20%, 6,43% and 5,79% respectively, erasing the losses of November. The UK's FTSE index gained 4,61% while the Pound Sterling gained 1,43% against the Euro to close at 0,84 flat. The Slovenian SBITOP index slightly underperformed other European markets, but still added 2,24%.

In Japan the Nikkei gained 3,49% while Hong Kong remained under pressure and the Hang Seng  dropping 0,33%.

Oil partially recovered from its 20,81% loss in November, adding 13,64% in December to close at 75,21$ per barrel. Gold and silver added 2,93% and 2,71% respectively, gaining appeal as inflationary pressure remains high.

Overall 2021 was a good year in terms of both macro economics and market performance. The reopening of the global economy resulted in very strong GDP growth, boosted by exceptionally high consumer demand as people caught up with delayed spending of 2020. Also unemployment rapidly decreased. On the other hand the persistence of COVID caused supply bottle necks and labor and production shortages. The combination of high demand and limited supply caused inflation to spike as was expected, but it didn't prevent the markets from booking solid gains.

Over the whole year the Dax, CAC and Eurostoxx gained 15,79%, 28,85% and 20,99% respectively. The UK's FTSE index gained 14,30% while the Pound Sterling gained 5,92% against the Euro. The Slovenian SBITOP index had a magnificent performance, adding a whopping 39,37%.

In the US the S&P500, Dow Jones and Nasdaq gained 26,89%, 18,73% and 21,39% repectively while the dollar gained 6,23% against the Euro. Japan's Nikkei added a modest 4,91%. The biggest loser this year was China with the Hong Kong Hang Seng index dropping 14,08% over the year, resulting from the intervention of the Chinese Communist Party on major Chinese corporations such as Alibaba and Tencent Holdings, but also because of the real estate issues with the near financial collapse of China's largest real estate company Evergrande.

While inflation was our main concern in 2021, our focus now shifts to monetary policy as we expect it to become the primary driver of the markets in 2022. Its impact is already becoming visible as we speak. We expect inflation to reach its high during the first quarter this year and then gradually ease as consumer spending loses its 2021 growth momentum and supply chains get restored, so supply and demand start balancing each other out. Inflation will remain above the historical average though and that's why central bank policy will be so crucial. Also GDP growth will still be above the historical average but lower than last year while unemployment also continues to improve. In essence 2022 and also 2023 will be the years where the global economy normalizes towards pre-pandemic levels.

As for the markets themselves, proper geographic allocation of the assets will be key to outperform. Given the current valuations we intend to hold an underweight in the United States and overweight in Europe. Unlike in 2021, the Chinese market could become the big winner in 2022 even though political risk remains high. Also the UK has attractive valuations but is currently still struggling with the consequences of the pandemic – it may become more attractive later in 2022.

Happy New Year to you all from us at Primorski skladi and may it be a healthy and successful 2022.

Rudy Marchant
Fund manager Primorski skladi, d.o.o., Koper

Monthly reports - December 2021