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Capital Markets Update: End of year review 2021

Octopus31 December 2021

Market updates from 2021

A year in review

While perhaps not as much of a shock to the system as the year prior, 2021 nevertheless brought its fair share of surprises. Against the backdrop of high level administration changes and the continued fiscal support of central banks to limit the economic impact of the pandemic, several key themes developed, including our increasing interconnectivity, supply chain difficulties, and a resultant increase in prices.

A new Commander in Chief

The start of the year saw the inauguration of President Biden, and the Democrats securing both the House and Senate after a tight victory in Georgia, in spite of Trump’s refusal to concede, and a deadly assault on Capitol Hill. This win not only granted temporary reprive to a hitherto chaotic administration, but also buoyed markets with the prospect of a larger stimulus package being agreed to help the world’s largest economy recover. Although there were certainly some wins for the Democrats throughout the year, who re-engaged on an international stage and rejoined the Paris Climate Accords, as months progressed it became apparent its tenuous grasp of the Senate meant that it could be a struggle for the Biden administration to enact significant change. There was a continued struggle with Republicans to raise the debt ceiling towards the latter half of the year, and the $1.45tn “Build Back Better” economic and climate infrastructure plan was stalled to 2022 after West Virginia Senator Joe Manchin signalled he would not support it.

GameStop and beyond

While change was slow to occur from those at the top, this year showed the increasing influence of people on a grassroots level. The end of January saw a blow to multiple hedge funds when their short selling of GameStop shares became targeted by retail investors led by the Reddit thread WallStreetBets to enact a ‘short squeeze’, potentially causing unlimited losses to those shorting the shares. This highlighted the growing disruptive ability of social media as thousands of small traders could be instantaneously mobilised at once. Through the year we saw similar trends in ecological activism with shareholder rebellions in Oil & Gas, Chemical, and Tech, with environmental hedgefund Engine No 1 for example, who successfully installed three directors to Exxon’s board to push it towards a more sustainable business strategy.

Vaccines rollouts and new variant

In Spring the initial rollout of vaccines occurred in full swing in the developed economies in North America, Europe, and Asia, offering renewed hope of a faster than anticipated recovery. Indeed, most major stock markets continued to increase, with the S&P 500 hitting an all time high by the end of December, and the Nikkei’s highest year end close since 1989. This was in spite of the dominating Delta variant which was primarily responsible for the ‘second wave’ across the globe, causing multiple lockdowns in the lead up to the Summer, and testing the efficacy of vaccines to the limit. Although limited restrictions were in place in the UK since ‘freedom day’ in July, the arrival of the Omicron variant in November has led to the re-introduction of safety precautions, and an accelerated booster program in the hope that the severity of the disease could be lessened, if not the spread.

The Ever Given blocks the Suez Canal

While the rapid spread of Covid in 2020 highlighted how frequently and far people travelled, it was 2021 which underlined our reliance on international transit and supply chains, and how precarious they could be. In late March the Suez Canal was blocked for six days after the grounding of the Ever Given, causing shipping to grind to a standstill, and Lloyd’s List estimating a cost of $400 million in trade per hour it was blocked. The blockage exacerbated an already stretched supply chain caused by worldwide lockdowns affecting manufacturing, mining, and factory outputs, with semiconductor chip shortages from lockdowns in Malaysia and Xi’an making headlines as all manner of products from cars to phones, to games consoles were left unfinished and unable to be sold.

Gas prices rise and energy companies crumble

Supply was also restricted in the energy and gas sector, as reduced reserves and a lower than usual renewables output clashed with an expanded demand for power as countries sought to recover production losses. As energy prices are capped in the UK this led to a large loss for many utility providers who were unable to pass on the cost to consumers, and resulted in many going into administration. However this also presented an opportunity for better structured utility companies such as Octopus Energy, who took on a further 580,000 customers after Avro energy ceased trading, and in September secured further investment of $600m from Al Gore’s sustainability fund, Generation Investment Management.

Inflation on the rise

The diminished supply of goods, the increased costs for production, and the vociferous demand of consumers led to prices increasing across a wide array of products and services. The key question being asked by economists and banks alike was whether price increases were ‘transitory’, and would shortly settle, or permanent, which would require more action. Whether it is temporary or not is yet to be seen, however with UK inflation hitting 5.1% in October and not yet abating, the Bank of England raised interest rates from 0.1% to 0.25% to try to limit its impact, and it is expected that other central banks will follow.

Looking forward into 2022

So what are we expecting from 2022? We would not necessarily expect to see the same levels of growth as this year, as most stock markets have now returned to, or exceeded, pre-2020 levels at this stage. However, if vaccines continue to remain effective in the face of any further variants, and as more protective measures roll out including antiviral pills for severe cases, we would still expect positive economic growth in the coming twelve months in the developed economies, with continued difficulties for poorer nations who have not been able to obtain vaccines on remotely the same level.

The main focus of central banks this year will likely be on inflationary pressures, and further measures needed to prevent a feared ‘big squeeze’ of high prices in 2022. The fear is that any approach which restricts growth, as an interest rate increase could do, would risk an environment of low growth and high inflation - and with it the spectre of stagflation.

As always the key for investors will be to adopt a diversified approach to their portfolio to help spread the potential risk across a wide array of sectors. Whilst the main risks on the horizon continue to be that of inflation and tax rises, by maintaining a healthy exposure to equity markets and diversifying globally, our customers should be well placed to face into these headwinds and prosper.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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