Equity Year 2021

USA wins the gold medal

All in all, a very good equity year came to an end. Interestingly, the mood on the stock markets is anything but euphoric – a good sign from a contrarian perspective. Under the surface of the broad stock indices, individual stocks corrected strongly in the last quarter. Thus, there remains enough to do in fundamental stock selection and the environment for 2022 is promising.
Our summary view for 2022 is: equities up – volatility too. We think we should expect higher price movements in 2022 than in 2021. The last quarter was already a taste of that. But this is nothing new – rather a return to fluctuation-heavy normality on the stock markets. Last year was already the second under strong Covid influence. Asia equities were still ahead when
the virus broke out in 2020, but the U.S. stormed ahead in 2021. That is good, because that is where the largest share of equities is invested in our portfolio management mandates.

The Asia region (excluding Japan) hardly moved and was far behind. This was mainly due to high investor skepticism toward China. The Japanese stock market also underperformed the U.S. by a wide margin, while Europe found itself in the middle of the pack.

Why still hold on to the Asia region?

The short answer: attractive valuations. For example, stocks listed on the Hong Kong Stock Exchange are trading relatively cheaper to the rest of the world than at any time since the Asian crisis in 1997. Unlike the U.S., Japanese stocks have not stretched their valuations in recent years. Japan is – along with the other markets of Asia – among the cheapest stock markets in the world.

Cheapness alone is not a sufficient instrument for finding turning points in stock prices. What is attractively valued may well become even more attractive. The question is rather whether the management of the companies uses attractive prices for wise capital allocation. In Japan at least, the first signs of change are visible – so for example in rising share buybacks.
In terms of bonds, inflation-linkers were a highlight. The allocation increases in mid-2020 and subsequently also in 2021 paid off. Otherwise, we continue to look for good debtor quality and a manageable term to maturity. That remains the best defense for 2022 in a world of burgeoning inflation.

During the setback in prices at the beginning of the Omicron wave, we actively decided to hold on to the overweight equity position. At the end of the year, the first studies were published that hospitalization rates were far below the delta variance. So we enter the new year with hope for returning normalcy.