The year 2021 was characterised by numerous Covid-19 waves and strains. Each new wave threatened to repeat the market sell-off we experienced in March 2020 and yet, no wave could scare the markets for too long. The mere promise of a vaccine was enough to revive interest in economically sensitive sectors previously sold off during lockdowns.

At the beginning of 2021 we expected a return to normality through synchronised global recovery underpinned by a successful vaccine roll out in developed markets. A year later we are faced with a new variant and lockdown resurgence accelerating across many developed markets creating uncertainty. Emerging markets (EM) have been dragged down by the single biggest EM economy, China, creating a headwind for commodities against the backdrop of a stronger dollar.

As 2021 came to an end, many parts of the world reported record numbers of new Covid-19 cases. During December 2021, pockets of the market began to sell off because governments threatened to implement more restrictions. By the end of 2021, however, most of these sectors had recovered, and many markets traded at all-time highs.

INFLATION

During the year we saw economies re-open, people resuming travel and a return to economic activity. We eventually realised the true impact of this pandemic has not been the virus itself, but rather a catastrophic global supply side shock and bottlenecks that have resulted in global inflation levels becoming very worrying, cemented recently by the US Fed’s decision to scrap the term “transitory”.

While many have debated why inflation is heading higher, the predominant reason is that the authorities found ways to put large quantities of printed money directly into consumers' pockets. This happened to a global economy that is still facing serious supply chain challenges. Inflation has indeed trended much higher.

Perhaps 2022 will be the year when the market enters ‘acceptance’ of high inflation. If so, this will likely mean that interest rates will move much higher. This in turn may lead to a period of ‘depression’, resulting in a general market sell-off. But the ultimate acceptance of high inflation will result in real assets outperforming.

EQUITY MARKETS IN 2021

The JSE All Share Index capped off a great year in rising 29%, being the best year for the Index since 2009. Equities had a phenomenal run in Q4, posting a gain of 15% with resources bouncing back strongly despite concerns of a slowdown in Chinese residential property sales. Global markets continued to shrug off an increasingly hawkish US Fed which announced that they would double the pace at which they are scaling back asset purchases, to $30bn a month. Additionally, US Fed officials are forecasting four rate hikes in 2022 as they attempt to rein in inflation.

SELECTED GLOBAL WINNERS AND LOSERS

DESTINY PORTFOLIOS

During 2020 and 2021, we positioned our portfolios into assets that have the potential to be less affected by inflation. This positioning has already served us well.

The GIB Investment committee maintained its decision that cash’s ability to yield return had been compromised by the 2.75% reduction in the repo rate during 2020, in contrast to government bonds’ ability to yield returns. To this end, cash holdings were reduced, and the bond allocation was increased. This resulted in a 9.61% return as opposed to a cash return of 4.82%.

In terms of the global vs local holdings, the conclusion was that global economies will have fewer recovery challenges and therefore the offshore holdings were increased across the board, however, strong performance from our local asset managers contributed to the excellent 2021 returns.

In line with our view of increasing Destiny’s offshore holdings, we are excited to announce that we have added a leading global asset manager, Fundsmith. They will manage a portion of the Destiny offshore component that will complement our existing global asset managers.

GIB DESTINY PERFORMANCES IN 2021

IN SUMMARY

Given the exceptional circumstances of 2021, we are satisfied with how we navigated the choppy markets for our membership.

We therefore approach 2022 as we approach each year - not as Optimists and certainly not as Pessimists. We are Realists. The pessimist complains there is no wind. The optimist waits for the wind to arrive. The realist adjusts his sails.