Wednesday, 29 December 2021
Written by Royce Tan, Chief Market Insights Officer of GAX MD
THE economic turmoil triggered by a health crisis in 2020 was expected to be left behind us as we approached 2021 with much optimism of a recovery, led by strong inoculation drives.
Looking back at the entire year that has passed, 2021 has been one of the classic examples that expectations and projections do not actually meet reality. It was no less of an erratic year, with various events sending the markets on a roller coaster ride, from new Covid-19 variants to renewed lockdowns and rising inflation figures.
Central banks around the world have pumped in about US$32 trillion into their respective economies through many stimulus packages since the outbreak of Covid-19 in 2020 to cushion the blow caused by lockdowns. At the same time, the market capitalisation of equities globally has risen by US$60 trillion.
But every time there is a positive movement in the markets, there is surely an event that would reverse the upward trend. Despite the cautious sentiment in the markets in 2021, the transfer of wealth was immense as investors and traders looked beyond equities and fixed income to cryptocurrencies, non-fungible tokens (NFTs) and meme stocks.
Here are the major events that shaped the markets in 2021.
1. Delta and Omicron
The Delta and Omicron variants kept the fears of the investors in check as news flows of the detection of new variants and spike in cases translated to pessimistic views among investors, who feared another lockdown which could crash the economy and the efficacy of available vaccines against new Covid-19 variants.
2. GameStop short squeeze
What started off as a discussion on the ‘wallstreetbets’ subreddit (a forum on the Reddit website) on high-risk stocks spiralled into a coordinated effort to squeeze out a short position held by hedge fund managers, who were betting to profit from the declining share price of GameStop.
A squeeze happens when there is a sudden rise in price of a heavily shorted stock so when retail investors who had already owned the GameStop shares induced other members of the subreddit to take a position in the counter, this sent the share price surging 1,500% to an intraday high of US$483.00. Hedge fund managers were forced to buy back the shares at a high price, multiple times higher which caused them losses in billions of dollars.
3. Archegos Capital margin call
Archegos Capital Management is a family office that manages the wealth of American investor Bill Hwang. Archegos invests in stocks listed in the United States (US), swap contracts and contract for differences (CFDs).
What hit Archegos was its usage of excessive leverage to multiply returns and losses from margin trading facilities provided by banks. Banks that offered these services to Archegos began liquidating stocks held by the family office when it failed to meet its US$20bil margin call.
Due to the large amount that was needed to be recovered, the affected shares took a sharp dip when large blocks were unloaded into the market. This affected banks such as Credit Suisse, Nomura, Morgan Stanley, UBS and Mitsubishi UFJ Financial Group.
4. China’s regulatory crackdown
China went on a clampdown that targeted giant tech companies this year as the Government embarked on policy reforms for common prosperity and national security. The Government has been lenient towards the tech sector, which allowed many unicorns to expand into giants, but some of them are using their size and presence to monopolise their positions, eliminate competitors, exploit consumers and deny workers basic benefits.
Tech companies that were affected were those in the education, finance, food delivery and internet sectors. China went down hard on the edutech sector, as it became one of the main reasons for higher costs of living, which in turn lowers the country’s birth rate.
The regulatory overhaul led to a major selloff of Chinese stocks, especially those tech-related, erasing US$1.5 trillion in market capitalisation at its worst.
Meanwhile, Evergrande, the second largest property developer in China, hogged the limelight this year for being the world’s most indebted property developer after racking up more than US$300bil of debts.
It is facing problems to repay its banks, bondholders and suppliers and were also unable to deliver homes to their buyers. The risk of it defaulting and collapsing shocked the markets and caused its share price to tank by about 90% this year.
Despite the US Federal Reserve constantly harping that inflation is transitory, it decided to retire its use of that word just recently, acknowledging that it would be difficult to predict how long the effects of supply chain issues will linger and that factors pushing inflation upwards will linger well into next year.
In October, the consumer price index (CPI) in the US rose 6.2% year-on-year (y-o-y), the highest it has seen in 30 years. In November, the CPI hit 6.8% y-o-y, the highest 12-month increase since the period ending June 1982.
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Outlook for 2022
So now that we have gone through some of the major events that have transpired in 2021, what is in store for 2022?
Inflation will still be a major theme shaping the markets in 2022 and central banks are expected to be more hawkish and will begin tightening monetary policies to curb inflation. While there are differing views about how inflation would pan out in 2022 and the resulting policy response, the general consensus is that inflation will be on an upward trend.
The Fed, for instance, is planning to double up the pace of its tapering, which means that it will further cut down its monthly bond purchases that were used to stimulate the US economy. This will be slashed by US$30bil a month starting in January. This will allow the Fed some room to raise interest rates soon, with officials expecting three hikes in 2022.
Vanguard expects inflation to remain elevated across developed markets but should cool in 2022 but BlackRock expects high inflation to persist in years to come. Goldman Sachs expects the CPI in the US to hover above 4%. JP Morgan, on the other hand, thinks that inflation will moderate in 2022 in line with the increasing labour supply as the pandemic fades, though there will be a brief increase in prices and wages.
In China, regulatory clampdowns remain a risk as the country focuses on its priorities for common prosperity but we do not foresee it to be as intense as what it was in 2021. Covid-19 outbreaks also remain a risk, especially with the latest case in the city of Xi’an, which has since been put under lockdown, affecting 13 million people.
In Asia, the improving pandemic situation and the high vaccination rate looks promising for a better 2022 which could allow for the resumption of the economies to pre-pandemic levels. While the inflation levels may not be as intense as the US or Europe, one of the downsides could be unfavourable currency exchange rates as the greenback is expected to strengthen on tighter monetary policies.
To conclude, we are of the opinion that financial markets will be marred with uncertainties in 2022, on the back of rising inflationary pressure globally, rising interest rates and risks of further supply chain disruptions that may be caused by new Covid-19 variants.
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