How to make money in 2022 by learning from 2021

The underperformance of bonds last year will not have surprised too many people. The low negative total return on government bonds was a natural consequence of the great macroeconomic development of 2021, the return of inflation. The rise in prices ranges from kryptonite to bonds. They eat away at the value of their fixed income and their return on fixed capital to maturity. And they cause interest rates to rise.

The prospect of tightening monetary policy is part of the reason for the negative performance of emerging market equities last year. Rising US interest rates are bad news for governments, businesses and households in developing countries that borrow in dollars. Emerging markets are never doing well at this point in the cycle.

Elsewhere in the stock markets, Wall Street’s outperformance won’t surprise many either, even if its nearly 30% total return did. Simply put, this is where the growth is. And the markets generally follow corporate earnings.

It may be the most expensive stock market, but in a world of little certainty, we have been able to count on the performance of American companies, and especially the tech titans that dominate the American stock market.

So far, so predictable. The most interesting questions arise about which assets performed unexpectedly, good or bad in 2021. This is where the real lessons can be learned.

The second best performance in my analysis came from commercial real estate as measured by a global Reit index. The property generated a total return of 35pc last year which would have seemed inconceivable as vaccines were just starting to roll out, we were entering what ended up being a three and a half month lockdown and with prices of real estate already at a historically high level based on their rental yields.

The property looks like a “Tina” investment today. In a low interest rate environment, in which bonds offer risk with no return, maybe “There is no alternative”.

At the other end of the performance chart, Japan and China surprised in different ways. It would have been reasonable to assume that Japan would benefit from a revival of the global economy. It is a cyclical market that generally thrives when activity picks up around the world.

But his botched Covid response and political uncertainty left him near the back of the stock market. A year ago, China’s case focused on being the first to enter and the first to exit the pandemic, but it shot itself in the foot on three fronts: trying to eliminate rather than living with Covid; pursue social engineering at the expense of economic growth; and looking away from the property as evidenced by the Evergrande fiasco.

The last dog that didn’t bark last year was gold. The precious metal has always been a safe haven in times of uncertainty and especially when inflation begins to rise. In an environment of negative real interest rates, one would have expected gold to shine in 2021 but it has lost its luster in favor of other commodities and in particular Bitcoin.

Thus, 2021 has been a year of divergent and ultimately unpredictable investment results. The only certainty last year was uncertainty. And that should give a fair warning to those of us who dare to make predictions about the next 12 months this time of year. Be humble. To diversify. Prepare for the worst and hope for the best.

Tom Stevenson is Director of Investments at Fidelity International. The views are his. He tweets to @ tomstevenson63.

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