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November review 2021

Summary

Investor bearishness may be important to watch as a leading indicator, but eyes will be firmly fixed on the implications of the Omicron variant of Covid-19 as the world gathers more data on it towards year-end.

It’s all Greek to me

November’s big events consisted largely of two key items, COP 26 in Glasgow and the emergence of a new strain of Covid-19.

The latter has, like its predecessors, been given a letter from the Greek alphabet to identify it as opposed to the country where it was first identified. Following on from the Delta variant, which has been prevalent in Europe recently, the Omicron (B.1.1.529) variant and its quite different make-up, unnerved investors in the final week of November after the World Health Organisation (WHO) described it as a variant of concern.

It’s too early to tell how dangerous it can be to those who are infected by it although initial indications suggest that for the vaccinated, symptoms are relatively mild. Its ability to be more transmissible than the Delta variant hit markets like a blow to the solar plexus (part of the body not a renewable energy source) in the final week of November.

COP 26 grabbed much of our attention during the first half of November without too much impact on financial markets, in contrast to Omicron’s downward pressure on risk assets’ prices.

COP 26 did focus investors’ minds on the challenges ahead to achieve net zero and the respective landmarks on the road to 2050 but many will have been disappointed by the final outcome and the phasing down of coal not its phasing out – to appease China and India. Nevertheless, this now high profile get together can be seen optimistically, as a major step in the right direction on necessary climate change action.

It remains to be seen whether promises made will be adhered to, but progress can be measured at next year’s COP 27 in Egypt.

The final session of November was the first day of a two-day testimony by US Federal Reserve Chairman, Jerome Powell. Powell stated that he was considering an earlier end to bond tapering (aka quantitative easing or QE). He also conceded that the spike in inflation is looking less transitory.

These comments added to financial markets’ anguish to close out November, yet the economic recovery witnessed in 2021 would suggest QE in the US and UK is much less necessary than previously. Weaning markets off the QE drug has historically been challenging.

Earnings

You could be forgiven for thinking that corporate earnings have been something of a disappointment with rising labour costs arising from shortages and higher input costs.

The following graph from Bloomberg tells a different story. Margins have been at least maintained for many businesses, offering support to their share prices.

Big in Japan

Financial media focus has been on fiscal stimulus in the US so Japan’s budget for the fiscal year 2022 didn’t get much media attention outside Japan.

New Prime Minister Fumio Kishida’s government has put forward a record (for the 10th year in a row) budget of over £700 billion to bolster the Japanese economy.

For the international investor, Japan is sometimes overlooked but contains many theme-leading global companies.

Bearishness

Increased markedly in November, often a leading indicator.

Markets
Sector returns were a mixed bag in November with conventional energy taking the biggest hit, not helped by COP 26’s focus on the harms of fossil fuels on the climate.

US equities, driven by technology, led the way in November while the rest of the world’s equity markets largely posted negative returns, Japan being one of the exceptions as was Taiwan. Among major equity markets, the UK was one of the laggards. Smaller companies, having been one of this year’s success stories, underperformed across most regions in November.

Sterling was weaker against most major currencies, notably the US dollar. Gold had a strong start to November before fading in the second half. Bitcoin was volatile and weaker over the month. Industrial metals improved modestly in November.

Bond markets in the US had a mixed month with the yield curve flattening, as referred to in our November mid-monthly update. Two-year yields rose while five-year maturities and beyond fell, reflecting reduced inflation expectations further out. November’s high and higher than expected inflation reports in the US, UK and Europe, would appear a short term (out to two years) phenomenon as far as bond investors are concerned.

Yield spreads in credit markets widened amid market uncertainty. In the UK, gilts and their index-linked equivalents had a strong month as the yield curve flattening lowered longer-dated yields – even further below inflation.

In summary, November presented a number of challenges for financial markets, particularly in the second half of the month. After a strong year for developed equity markets, some valuations were difficult to sustain although earnings beats were plentiful and meaningful. Government bonds benefited from a risk-off shift but yield moves were often sharp.

The level of investor bearishness may be important to watch as a leading indicator, but eyes will be firmly fixed on the implications of the Omicron variant of Covid-19 as the world gathers more data on it towards year-end.

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