Developed market equities had a spectacular year as economies re-opened following mass vaccination programs. At the country level, the US continued to be the strongest performing equity market. The S&P 500 rose 21.6% as at 30 November 2021, while the technology dominated NASDAQ rose by a slightly lower 20.6%. Among the main developed equity market indices, the Hang Seng is by far the worst performer and fell 12.8% as investor sentiments towards China deteriorated through 2021.
Performance of Major Equity Indices (YTD 30th November 2021)
The fluctuating fortunes between value and growth stocks also stood out in 2021. Value outperformed growth by 6.7% in the year to 30 September 2021, with the outperformance concentrated in the March quarter of the year. Despite the recovery in value as an investment style in 2021, the long term underperformance of value relative to growth since the Global Financial Crisis persisted.
We are cautious on the outlook for developed market equities in 2022. Expensive valuations, the prospect of higher inflation and interest rates are all potential headwinds. The prolonged underperformance of the value style and its attractive valuation, compared to its historical average, suggest that there is a slightly higher than average probability of a relative outperformance outcome for the value style.
In contrast to the stellar returns generated by developed market equities, emerging market (EM) equities had a positive but subdued year. China is a major factor in the relative lacklustre performance of EM equities given its large weight of around 34% in the benchmark. The heterogeneous nature of EM equities is again demonstrated by the large disparity in returns from different countries: India surged by 51.9%, despite the ravage of Delta, while Taiwan, driven by strong demand for semiconductors, rose 42.1% and China fell 8.1%.1
The attractive valuation of EM equities, relative to developed market equities, is a feature which should support its return in 2022. However, China will be a key driver of EM’s outcome, due to the size of the economy and its weight in the benchmark. This means Chinese domestic political and economic developments, as well as Sino-US relationship will be critical.