• Rising inflation influenced changes in central bank monetary policy
  • Omicron wave threatens the world

In December 2021, the MSCI World index in euros rebounded 3,2% and ended the year with a 31% increase, while the emerging market index in euros increased in 2021 only by 4,9%. Such return dispersion was evident not only when comparing regions, but also inside the US, which showed one of the best performances this year. To illustrate, the S&P 500 index in euros rose by 36%, while small caps (Russell 2000 index in euros) posted only a 22% increase. Furthermore, the pandemic darling ARKK ETF, which invested in some of the most popular “lockdown” growth names like Zoom Video Communications, Teladoc Health, Peloton Interactive, Tesla and others, recorded a 24% decline over the year, after reaching a peak in February 2021. 

Equity markets in 2021

Source: Bloomberg LP

Investors waited for December central bank meetings with concern expecting announcements to cut bond buying programs and indications of potential rate hikes sooner than expected. The Bank of England was the first from G7 countries to raise interest rates from 0,1% to 0,25%. The US Federal Reserve (FED) chairman Jerome Powell signaled, that high inflation has become a major concern, which could derail the country’s economic expansion. Such statement contrasts to previous rhetoric, that inflation is transitory due to supply chain bottlenecks, which soon would fade away. Furthermore, FED sped up the tapering of its asset‑buying program, while projecting interest rate hikes in 2022.

Meanwhile, the European Central Bank (ECB) temporarily extended its regular monthly bond purchases to smooth the phasing out of the pandemic stimulus. Thus, the Asset Purchase Programme will be doubled to 40 billion EUR a month in the second quarter of 2022, before gradually returning it to 20 billion EUR in October 2022. This should help to cushion a 1,85 trillion‑euro emergency program exit in March 2022. The ECB expects a strong economic rebound coupled with higher levels of inflation. According to the ECB projections, the inflation rate is expected to decrease to 3,2% in 2022, before falling below the 2% target in 2023. 

On 15 December 2021, China reduced the reserve requirement by 0,5 percentage points to 8,4% for most banks, hence, releasing 1,2 trillion yuan (~188 billion USD) of liquidity. It was the second reduction this year, with the central bank aiming to mitigate the worsening situation in the real estate market. One of the biggest real estate developers in the country Evergrande was officially labeled a defaulter and local creditors have sued company for more than 13 billion USD in allegedly overdue payments. There is a major concern, that Evergrande’s default could cause a real estate meltdown in the country or even affect stability of the global financial system, because the company’s debt exceeds 300 billion USD. Moreover, there have already been signs of the spreading contagion in the Chinese real estate market, with smaller real estate developers having liquidity problems and announcing defaults.

New COVID cases per million people

Source: Johns Hopkins University CSSE COVID‑19 Data

The rapidly rising new COVID‑19 cases could still affect manufacturing and produce even more bottlenecks. The potential introduction of new lockdowns, in order to prevent occupancy rates in hospitals from rising, pose the largest threat to the economic recovery. Nonetheless, although the quickly spreading Omicron variant threatens to cause more challenges, booster shots and rising vaccination rates help to remedy the situation. Moreover, the latest data shows, that the average case fatality rate in the EU and the US dropped by half since the end of October 2021.

“House view” update

The Luminor investment team maintained neutral risk allocation. The year‑end rally raised the world equity index to new highs, yet changes in monetary policy and rising new COVID‑19 cases provide enough reasoning to remain cautiously optimistic.



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