A Review of 2021: By Dorian Squires and Joanna Ho of Compass Independent Financial Services Ltd
2021 brought hope for global economic growth following 2020’s coronavirus downturn. This was largely tied to the development and widespread deployment of COVID-19 vaccines.
Both Delta and more recently the Omicron variant hindered a full bounce-back of economic activity and has influenced the debate of the future of living with the virus versus lockdowns and restrictions.
Never has Einstein’s quote, “learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning” been more relevant than over the last couple of years.
Alongside this, high energy prices and supply chain pressures spurred record-high inflation. An ongoing rise in demand alongside supply bottlenecks has challenged the previous assumption of Central banks that inflationary pressures would be entirely transitory and Central Banks continue to put a policy in place to ease off the monetary accelerator.
As well as the ongoing influence of the virus and inflationary pressures, China’s recent regulatory interventions and concerns about the property market has dominated markets in 2021. This was especially highlighted by the coverage of the troubles faced by the Chinese property develop Evergrande. These reforms are all part of China’s “common prosperity” agenda following the rise in inequality over the past decade or so. Whilst a focus on modestly lower but more sustainable growth should not deter longer-term investors from the opportunities that China, and Asia as a whole, offer, it has led to some volatility in the short-term as investors worry about additional measures that could be introduced.
As always, the US stock market led the way in 2021 in terms of dictating direction and themes. The US market also saw the year open with a phenomenon, never been witnessed before, which was the trading of stocks by inexperienced “basements investors” betting against large institutional hedge funds. This phenomenon was driven by a group of young investors who, during lockdown, used various media outlets to encourage other “basement investors” to push the price of stocks up, which hedge funds were trying to short (selling hoping to buy back at a cheaper price). The most notable stock which was caught up in this was GameStop. This trend became known as “meme stocks”, keying off the power of social media to mobilise large numbers of people with time on their hands. Ironically, RobinHood a US trading app that was one of main beneficiaries of this phenomenon, listed itself in July raising over $2bn.
Whilst cryptocurrencies remain a highly unregulated asset class, they took a small step towards a more substantial footing with Coinbase, a company that allows people to trade cryptocurrencies listed on the New York Stock Exchange (though interestingly like the currencies themselves, Coinbase is a purely digital company that has no physical headquarters). In addition to this a Bitcoin ETF (exchange traded fund) came to the New York Stock Exchange and a similar vehicle launched on the NASDAQ (another US stock market). This should be balanced alongside China banning cryptocurrencies and the mining of crypto. Caveat Emptor (buyer beware) remains the key here!
2021 also marked a seminal moment on the road to a net-zero carbon world, with many governments and corporations pledging at COP26 to shift away from fossil fuels and lean towards more responsible investing.
As always, 2021 also fully demonstrated the need for a well-managed, diversified portfolio as yet again many markets that performed poorly in 2020 did very well in 2021 and vice versa. The perfect example of this was gold which was one of the best performing asset classes in 2020, became one of the worst in 2021 posting a negative return. Conversely the UK, which was the worst performing sectors in 2020 was one of the best performing sectors in 2021.
As the attached “Why Diversification Is Key” table demonstrates, a diversified portfolio (as illustrated by our Compass 6 Growth portfolio) that moves between the asset classes offers the best potential to benefit without taking the undue risk of investing in just one sector.
Whilst we do not anticipate markets posting the stellar returns they have over the past couple of years, we still believe that investing remains key to long-term success and it’s likely that we will move into a more normal market cycle and returns moving forward, but as the Greek orator Demosthenes said; “Small opportunities are often the beginning of great enterprises”.