International Equities Q4 2021
International Equities Q4 2021
December 22, 2021
William H. Witherell, Ph.D.
Chief Global Economist
The global economy is ending a year of strong recovery, with real GDP growth estimated at 5.7%, following the sharp 3.5% decline in 2020. The recovery was fueled by massive emergency fiscal support by governments, together with very easy monetary policy by most central banks, keeping interest rates low. Consumers, who had accumulated a large hoard of excess savings during the pandemic, started to spend and thereby to lower household saving rates back to more normal levels. However, recurring waves of COVID infections, which continue as this is written, and government responses with restrictive measures have slowed the pace of the recovery, hitting the service sectors of economies and contributing to widespread supply bottlenecks. New outbreaks of COVID in China, the globe’s second largest economy, have had a particularly important impact on supply chains. The bottlenecks, including big backups at ports, have been a major problem for manufacturing firms and have impacted global growth. While recently there have been some indications that global supply-chain disruptions may be peaking, the shortages in semiconductor chips are likely to continue to be a concern in 2022.
Global equities as measured by the MSCI ACWI Index of global large- and mid-cap stocks rose a healthy 16.3% year-to-date December 17th. However, when the US stocks are excluded, whereas the S&P 500 advanced by 23%, the international equity markets gained just a modest 6.2%, according to the MSCI ACWI – ex USA Index. This number hides great variation among markets. The advanced-economy markets, with the MSCI EAFE Index up 9.5%, continued to outperform the emerging markets, where the MSCI Emerging Market Index lost 3.3%. An unexpected slowdown in China in the second half, resulting from COVID outbreaks, restrictive government actions affecting the technology and internet sectors, and financial problems in the important real estate sector, hit earlier high-flying Chinese equities, with the MSCI China Index down 21.3% year-to-date December 17th. Aside from China stocks, emerging markets as a group have performed almost as well as advanced ones, with the MSCI Emerging Markets ex China Index gaining 8.4%. There have been wide differences in the performance of individual national markets, with a number of Asian markets outperforming and Latin American markets generally underperforming. Similarly, advanced-economy market performance varied, with France, Sweden, Switzerland, and Canada outperforming and Japan underperforming. While many factors account for such differences, this year’s experiences with COVID and government pandemic policies, in particular with regard to vaccination progress, have been important.
The global economy and markets are ending 2021 on an uncertain footing. As we write, equity markets have declined for a third day, reflecting the distaste investors have for uncertainty. Now (December 21), markets are rebounding as market sentiment whipsaws and volatility is high.
Perhaps the most important uncertainty confronting investors is how serious the health implications of the Omicron variant of COVID will prove to be as it spreads rapidly around the globe, and what the actions of governments, firms, and the public will be in response. The health situation in advanced economies, despite relatively high vaccination rates, is likely to deteriorate in the opening weeks of 2022, with overloaded hospitals, governments imposing restrictions, businesses hesitating to make new commitments, and consumers again accumulating savings rather than buying services. The effects on the largely under-vaccinated emerging markets with less-developed health systems are likely to be more prolonged and severe. It does look certain that global economic growth is losing momentum and that the COVID pandemic will result in slower economic growth in the first quarter of 2022. Will the global economic recovery regain momentum in the second quarter and beyond, or will the pandemic continue to rage with new waves, possibly fueled by new mutations, pushing economies into a new recession? Nobody knows.
Another source of uncertainty is the future course of inflation and the policies of central banks. The recent acceleration of inflation to levels that had not been seen for decades has understandably created concerns. The economic recovery and the ending of lockdowns, leading to a sharp increase in demand that confronted slow-to-adjust supplies, was expected to result in higher prices, as was the extraordinary amount of liquidity central banks were injecting into economies. Will the pace of inflation ease in the first half of 2022 as central banks begin to reduce their accommodation, government fiscal policies tighten, and supply-chain bottlenecks ease? If high inflation rates persist nevertheless, will central banks accelerate their cuts of the liquidity they have been providing and begin raising policy rates earlier than now expected, possibly overreacting and threatening the recovery?
The future course of China’s economy and its government’s policies are another cause of uncertainty for investors. China’s economy is the globe’s second largest. Its domestic market is huge. China provides intermediate goods to companies around the world and plays a central role in global supply chains. China will enter 2022 with slower economic growth. The government and the central bank are expected to take steps to support the economy. Yet at the same time the government may well continue to take actions that have negative effects on its technology and internet firms and to use trade policy actions for political reasons. Will measures to address the serious financial problems in the important real estate sector succeed in containing those problems? The future course of trade relations with the United States is another important area of uncertainty, with implications for both the Asia region and global markets.
At Cumberland Advisors, despite the above uncertainties and others, we continue to expect positive growth in corporate earnings and equity prices over the course of 2022. Our International and Global Equity ETF Portfolios are close to fully invested, with a focus on advanced-economy markets in Europe, Asia, and Canada. Despite the global wave of Omicron-fueled COVID cases that is now weakening consumer sentiment and, less so, business sentiment, economic growth is expected to gather momentum next year, following a slow first quarter. Also, inflation looks likely to moderate significantly over the same period as energy prices decline, supply chains gradually improve, and consumers return to spending more on services rather than focusing primarily on purchasing goods. Corporate balance sheets are in good shape, and we expect earnings to continue to advance in the environment outlined above. There is likely to continue to be great variation among the recovery paths of countries and the performance of individual national equity markets. This will put a premium on selectivity and the ability to respond rapidly to market developments.
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Sources: Oxford Economics, ETF.com, Barrons.com, bbh.com, Financial Times, Goldman Sachs Economics Research, cnbc.com