What to make of the year’s winners and losers?
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Ah, another year over, a new one just begun.[i] We will publish our stock market expectations 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 are preoccupied with the biggest Tech and Tech-like stocks, which also did quite well last year. But Energy outpaced the competition with its 40.1% return, well ahead of second-place Tech’s 29.8%.[ii] Energy stocks tend to move with oil prices, as oil producers’ earnings depend 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. Crude surpassed its pre-pandemic price in March and continued rising for much of the year. 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. 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 capitalization, so anyone making great fortunes on the sector last year may not have been adequately diversified.[iii] 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, as Utilities is more defensive—demand for these services doesn’t really fluctuate with economic ups and downs. Thus, Utilities’ time to shine usually arrives in bear markets, when investors gravitate to its inherent stability. Lagging in bull markets is normal. 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 earnings—especially in markets where retail energy prices are regulated heavily.
Best Country: Austria. The country’s 41.5% return is even more astounding when you consider that continental Europe underperformed significantly.[iv] The region returned just 15.7%, behind the MSCI World Index’s 21.8%.[v] Additionally, Austria’s political backdrop wasn’t exactly great, with 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. The MSCI Austria Index has just five constituents, making 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.[vi] Its second-largest holding is an Energy company that returned over 40%.[vii] 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 -17.1% decline, the island nation notched the dubious milestone of negative returns in all six of the MSCI New Zealand’s constituents.[viii] While company-specific factors 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 each other. In our view, this is just more proof that it was lockdowns—not the virus itself—that hurt stocks in early 2020.
Best Style: Large-Cap Growth. This was a big shock to most pundits, who spent all year calling for value to lead as it usually does in a young bull market. But we think this young bull market has had an old soul from the start, as 2020’s bear market didn’t last long enough to reset the leadership cycle. Instead, stocks acted like it was a hugely oversized correction, with growth leading before and after the downturn. It remains ahead of value cumulatively despite some big countertrend rallies that favored value along the way. Yet within growth, 2021 featured a marked shift from small growth, which led in 2020, to large. See last week’s article for more, but we find this consistent with a maturing bull market, when investors usually favor quality, liquidity and big gross profit margins. In our view, larger, growth-oriented stocks will probably lead for the duration of this bull market, until a traditional long, grueling bear market resets the cycle for value to lead in a recovery.
Best Performing Stock: AMC Entertainment Holdings. What can we say? Some meme stocks had staying power. That worked out well for deep value 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 priced in now. Markets look forward, not backward—logic you can apply to all 1,546 stocks currently in the MSCI World Index.
[i] Source: Plastic Ono Band, as of 1/3/2022.
[ii] Source: FactSet, as of 1/3/2022. MSCI World Energy and Information Technology Index returns with net dividends, 12/31/2020 – 12/31/2021.
[iii] Ibid. MSCI World and MSCI World Energy Index market capitalization on 12/31/2020.
[iv] Ibid. MSCI Austria return with net dividends, 12/31/2020 – 12/31/2021.
[v] Ibid. MSCI Europe Ex. UK and MSCI World Index returns with net dividends, 12/31/2020 – 12/31/2021.
[vi] Ibid. Erste Group Bank AG market capitalization on 12/31/2021 and price return, 12/31/2020 – 12/31/2021.
[vii] Ibid. OMV AG market capitalization on 12/31/2021 and price return, 12/31/2020 – 12/31/2021.
[viii] Ibid. MSCI New Zealand Index return with net dividends, 12/31/2020 – 12/31/2021.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.