The economic environment as well as financial market developments were largely dominated by the massive support provided by monetary and fiscal policies following the outbreak of the COVID-19 pandemic. The combined and unprecedented measures of central banks and governments around the world encouraged a powerful rebound in economic activity in 2021. A positive economic cycle emerged with an increase in household consumption, rising corporate profits, an improved labour market and consequently higher investments.

The strong recovery in global growth culminated in the middle of the year, with continued differences between the major economies. As the growth upswing in China reached its peak in the fourth quarter of 2020, the USA reached it in the second quarter of 2021, followed by Europe during summer. 2021 was also marked by a change of political and economic regime in China.

Following a strong growth policy, the Chinese authorities showed their will to give growth a more qualitative dimension. This was expressed mainly in new regulations in many sectors. In addition, concerns about the real estate sector increased. The risk of default by property developer Evergrande fuelled fears that a collapse in the sector could spread worldwide.

Inflation

Reports on the strength of the economic recovery went hand in hand with beliefs about a rise in inflation, already fuelled by labour and commodity shortages as well as supply chain disruptions. Consumer price inflation approached its highest level in 30 years.

Rising energy prices also contributed to price pressures, as the price of crude oil rose by more than 50% this year.

During the third quarter, the US Federal Reserve (Fed) acknowledged at its September press conference the risk that inflation could remain at above-average levels for longer than expected.

Financial market developments

In this respect, the markets for government bonds developed negatively overall. Rising inflation rates fuelled expectations of a normalisation of monetary policies and thus rising interest rates. However, uncertainties about Chinese growth combined with the resurgence of health issues pushed interest rates down again at the end of the year. Nevertheless, it is worth noting the good performance of inflation-linked bonds, which have benefited from the surprises of rising inflation and falling real interest rates.

Credit strategy returns were mixed, with high yield performing positively on one side and investment grade corporate bonds performing negatively on the other. For the second year in a row and particularly impacted by developments in the Chinese real estate market, emerging market bonds suffered significantly in 2021.

Buoyed by encouraging growth prospects and continued accommodative monetary policy, equity markets rallied strongly over the course of 2021. However, they corrected downwards again towards the end of the year. Geographically, the big winners were the US, with strong growth earnings and unprecedented monetary and fiscal policy, followed by Europe.

In contrast, emerging market equities ended the year in negative territory as Chinese growth slowed. In this environment of economic recovery, it was the growth stocks that performed the strongest.

Real estate investments grew strongly and were the asset class that developed most significantly during the year. The value of real estate increased and buyer demand jumped, all against a backdrop of historically low interest rates.

Although we could have expected a rise in gold price in an environment of sustained inflation, it failed to surpass its August 2020 highs. It ends the year slightly up, supported by very low real rates in the US.

 

---