The world’s share markets generally produced solid returns in 2021, but UK stocks and fixed-interest investments suffered. Maintaining an international outlook in your portfolio can help underpin its value.
|Dow Jones Industrial||+18.7%|
|Standard & Poor’s 500||+26.9%|
|Nikkei 225||+ 4.9%|
|Euro Stoxx 50 (€)||+21.2%|
|MSCI Emerging Markets (£)||-3.7%|
2021 was a good year for most investors in share-based funds, particularly those who had holdings linked to the US market.
Despite the optimism around the beginning of Covid-19 vaccine rollouts, there was no promising start. However, once January was out of the way, the US, UK, and European markets began to move upwards. The arrival of the Covid-19 Omicron variant in late November prompted a change of direction, but this was reversed before the end of the year.
Overall, the UK stock market lagged the US once again, with the leading US indices regularly achieving new highs throughout the year. This reflects the growing dominance of technology companies in the States to no small degree. Of the 500 companies in the S&P 500, the professional’s US market index, just half a dozen account for a quarter of its value. All are familiar brand names, although the label given to their holding companies may be less so: Apple, Microsoft, Amazon, Alphabet (aka Google), Tesla and now Meta (aka Facebook). Apple alone has a value of $2,900 billion, making it worth more than the entire FTSE 100.
While shares performed well in 2021, it was a poor year for fixed-interest investors. That might seem surprising as the US, European and Japanese central banks all kept rates at around zero throughout 2021, while the Bank of England waited until December to raise its interest rate by just 0.15%.
However, the mood music on interest rates changed as the year progressed, primarily because inflation in Europe and the US rose well above the bankers’ targets of around 2%. An increase in US rates – the first since December 2018 – could come as early as March.
There are a few lessons to draw from 2021:
- Without the benefit of hindsight, it is virtually impossible to hit the perfect timing for investment. January 2021’s lockdown was an excellent time to invest, but it did not feel like it back then.
- Inflation and the prospect of rising interest rates have become a concern for bond investors but not – at least, not yet – for equity investors.
- International diversification remains valuable for UK-based investors. The UK now accounts for only about 3.5% of the world’s stock markets by value.