Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no politician nor any political party and assess political developments for their potential economic and market impact only. Additionally, MarketMinder Europe does not make individual security recommendations. The below merely represent a broader theme we wish to highlight.
Ah, another year over, a new one just begun.[i] We will publish our stock market forecast for 2022 in due time, but first things first: With the final results in, let us take a look back at the year that was. Which categories within the MSCI World Index did best and worst in 2021, and what lessons can investors learn?
Best Sector: Energy. Yes, headlines throughout financial publications we follow seem preoccupied with the biggest Tech and Tech-like stocks, which also did quite well last year. But Energy outpaced the competition with its 41.4% return, well ahead of second-place Tech’s 31.0%.[ii] Our research shows Energy stocks tend to move with oil prices, with oil producers’ earnings depending more on the price of crude than on production volumes. After getting hit hard in 2020’s lockdowns, oil prices bounced back sharply in 2021.[iii] Crude surpassed its pre-pandemic price in March and continued rising for much of the year.[iv] Autumn’s Europe-led natural gas crunch added more fuel to the fire, as it spurred demand for alternate energy sources, including oil. This all drove a smashing recovery for Energy companies’ earnings, which were abysmal in 2020.[v] But don’t let this give you fear of missing out if you didn’t have a huge Energy weighting in your portfolio last year. Energy began the year as just 2.7% of MSCI World Index market capitalisation, so anyone making great fortunes on the sector last year may not have been adequately diversified.[vi] (Market capitalisation, which is share price multiplied by number of shares outstanding, is the total market value of a company or index.) Taking big sector risks might look nice when they pay off, but they can also be severe setbacks when things don’t go as you anticipated.
Worst Sector: Utilities. No shock here, in our view as Utilities is more defensive—demand for electricity, home heating and other similar services doesn’t really fluctuate with economic ups and downs. Thus, our research shows Utilities’ time to shine usually arrives in bear markets, when investors gravitate to its inherent stability. Lagging in bull markets is normal.[vii] But it had extra headwinds late last year, due to the aforementioned energy price spike. High energy prices are a cost for power providers, which hits their earnings—especially in markets where retail energy prices are regulated heavily, such as the UK.
Best Country: Austria. The country’s 42.8% return is even more astounding when you consider that continental Europe underperformed significantly.[viii] The region returned just 16.7%, behind the MSCI World Index’s 22.9%.[ix] Additionally, Austria’s political backdrop featured recurring uncertainty as two chancellors stepped down in quick succession, and the country returned one of the region’s strictest COVID lockdowns late in the year. But here is something Austria did have going for it: It is one of the MSCI World Index’s smallest markets by number of constituent stocks. The MSCI Austria Index has just five members, which we think makes its return subject to company-specific skew. Case in point: Its biggest holding is a bank that takes up almost 40% of the index and rose over 50% on the year.[x] Its second-largest holding is an Energy company that returned over 40%.[xi] Small countries often have outsized returns like this. We wouldn’t read into it … and we certainly wouldn’t chase it.
Worst Country: New Zealand. In addition to a -16.3% decline, the island nation notched the dubious milestone of negative returns in all six of the MSCI New Zealand’s constituents.[xii] Whilst company-specific factors likely mattered here, too, we also think it is fair to say the country’s extremely strict COVID restrictions hurt, as they largely closed the island off from the rest of the world even as other nations reopened and strengthened economic links with one other. In our view, this is just more evidence that it was lockdowns—not the virus itself—that hurt stocks in early 2020.
Best Performing Stock: AMC Entertainment Holdings. What can we say? Some meme stocks—those distressed companies that got popular in a stock trading group on social networking site Reddit early in 2021—had staying power. That worked out well for investors who bought before the craze and held on. But no matter how right you might think their core investment thesis is, it is likely reflected in the share price now. Our research shows markets look forward, not backward—logic we think you can apply to all 1,546 stocks currently in the MSCI World Index.[xiii]
[i] Source: Plastic Ono Band, as of 3/1/2022.
[ii] Source: FactSet, as of 3/1/2022. MSCI World Energy and Information Technology Index returns in GBP with net dividends, 31/12/2020 – 31/12/2021.
[iii] Ibid. Statement based on West Texas Intermediate (WTI) crude oil price.
[v] Ibid. Statement based on quarterly earnings in the Energy sector.
[vi] Ibid. MSCI World and MSCI World Energy Index market capitalisation on 31/12/2020.
[vii] Ibid. Statement based on MSCI World and MSCI World Utilities Index returns in GBP with net dividends.
[viii] Ibid. MSCI Austria return in GBP with net dividends, 31/12/2020 – 31/12/2021.
[ix] Ibid. MSCI Europe Ex. UK and MSCI World Index returns with net dividends, 31/12/2020 – 31/12/2021.
[x] Ibid. Erste Group Bank AG market capitalisation on 31/12/2021 and price return in GBP, 31/12/2020 – 31/12/2021.
[xi] Ibid. OMV AG market capitalisation on 31/12/2021 and price return in GBP, 31/12/2020 – 31/12/2021.
[xii] Ibid. MSCI New Zealand Index return in GBP with net dividends, 31/12/2020 – 31/12/2021.
[xiii] Ibid. MSCI World Index constituent count on 31/12/2021.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.
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