UK and emerging markets left behind in ‘whole rally’

The so-called rally of everything sparked by massive fiscal and monetary stimulus has left some major markets behind while some previous winners have sagged recently, leaving investors with a more complicated investment landscape in 2022.

Since March 2020, governments and central banks have rolled out multibillion-dollar support programs to mitigate the economic impact of the pandemic. This fostered a strong rally and a record return for financial markets, which has been so broad that some analysts and investors have called it “any rally.”

The MSCI All-Country World Index of global equity markets is now on track for its third consecutive year of double-digit returns – its first hat-trick in at least two decades.

Still, some asset classes and entire markets remained significantly more subdued, with UK and emerging equities standing out as those that largely missed the party. At the same time, as central banks prepare to relax some of their stimulus measures to ease inflationary pressures, a number of once-buoyant sectors have taken a turn for the worse in recent weeks.

“The ‘whole rally’ is a myth, it’s a misconception,” said Nikesh Patel, head of investment strategy at Kempen Capital Management. “The clues go up but it hides a lot of things underneath. There are a lot of ships sinking right now.

An MSCI gauge that tracks UK stocks has risen around 13% this year in US dollar terms, behind the 17% gain for the index provider’s broad All-World barometer and the 26% rise for the US benchmark as of December 28.

It is not a new phenomenon. Over the past decade, the MSCI UK Index has gained only 11 percent in dollars, far less than the 69 percent gain for the MSCI Europe gauge. The MSCI US Index rose 287 percent during this period.

Including dividends – a major component of UK stock market returns – they have beaten European equities this year, but still generated less than half of MSCI Europe’s total return of over 130% over the past 10 years. last years.

Although investors have increased their allocation to the UK slightly over the past month, according to Bank of America’s latest survey of fund managers, it remains by far the most hated market, for reasons ranging from Brexit to the scarcity of fast growing tech stocks in the UK. .

Yet even the most devious “value stocks” in less prestigious industries are now trading at a discount in the UK, said Robert Buckland, global head of equity strategy at Citi. “The UK has become a kind of aerial stock market,” he added. “If I’m a global fund manager and feel nervous about US stocks because they’ve done so well and look expensive, I’ll take a plane to JFK and fly to Frankfurt or Hong Kong. “

Equity markets in developing countries have also collapsed in recent times despite the favorable environment and the resurgence in commodity prices, and have now suffered a dismal decade.

The MSCI Emerging Markets Index started 2021 in good shape, climbing more than 10% in the first two months of the year, but has since been dragged down by Beijing’s regulatory crackdown on several major industries, hurting many actions which now constitute a large part of the benchmark. At the end of December, the index had fallen by 5% in 2021, reducing its 10-year gain to 34%, even below the modest appreciation of the British FTSE 350 gauge.

In commodities, the big loser has been an asset that many investors might have expected to benefit from the overactive policy of the central bank and the acceleration of inflation: gold. The price of a troy ounce of the precious metal has fallen by around 4% this year.

Even in superficially endemic markets like the United States, some regions have either failed to benefit from the recovery or have fallen apart in recent months as central banks prepare to tighten monetary policy.

By mid-December, nearly a third of Nasdaq Composite shares had lost more than 50% from their 200-day high, according to Société Générale. Meanwhile, just five stocks – Apple, Microsoft, Nvidia, Tesla and Alphabet – have contributed more than half of the S&P 500’s returns since April, according to Goldman Sachs.

Analysts say the potential return of unloved markets depends on whether or not inflation continues to be high and how central banks react. Few see a return for the UK, but some believe emerging markets now look attractive.

JPMorgan stock analysts believe emerging market equities will return 18% in 2022 thanks to a combination of growing corporate earnings and fears of an intensification and extension of China’s regulatory crackdown. Many investors agree. BofA’s survey of fund managers indicated that emerging market equities are expected to produce the best returns in the coming year.

Yet the combination of still robust economic growth, above-normal inflation and stubbornly low interest rates means stocks overall are still the best bet overall, according to chief strategist Wei Li. investments at the BlackRock Investment Institute.

“We expect next year to be another year of high for equities and one year of low for fixed income,” she said.

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