Big tech’s growth spurt
As 2021 approached, the world’s biggest technology companies looked set for a bumpy year. New subscribers to streaming services such as Netflix (US:NFLX) would dwindle as markets grew saturated, we said, while companies such as Facebook – now Meta Platforms (US:FB) – would suffer at the hands of regulators, keen to crack down on monopolistic behaviour and harmful online content.
However, 12 months down the line, these headwinds are still nothing more than a balmy breeze. The value of US tech stocks is sky-high and the Faangs continue to outperform the S&P 500 in price terms.
Netflix had a wobble early in the spring when subscriber growth fell below expectations. But no-one could have foreseen – or, subsequently, unsee – Squid Game, the group’s grisly South Korean hit, which 142m households tuned into. And after snapping up the entire works of Roald Dahl, Netflix doesn’t look short of content going forward.
The position of Meta seems less stable. The threat of regulation certainly hasn’t gone away and, while analysts remain bullish, Facebook will have to fight to stay relevant. But digital marketing has proved stronger than anyone expected and advertisers’ reliance on Zuckerberg’s platforms is unlikely to wane anytime soon. The halcyon days could last a while yet.
Oil’s resurrection
We also took the pulse of the oil industry last Christmas and the diagnosis wasn’t good. Climate-conscious banks, falling demand, wary investors and dwindling reserves looked like bad news for the sector and for retail investors.
2021 has proved, however, that the industry has some life in it yet. Oil prices surged to a seven-year high in October following supply shortages and oil majors have enjoyed a jump in short-term profits. This summer, for instance, Royal Dutch Shell (RDSB) announced a dividend hike and $2bn in buybacks in an impressive return to form. Similarly, in November BP (BP.) announced a share buyback programme for the rest of the year well above its surplus cash level in the third quarter.
Wildly swinging commodity prices do not endorse a sector's long-term profit credentials, however, and the problems facing the oil sector remain unchanged. Valuation multiples at Shell, BP, Chevron (US:CVX) and ExxonMobile (US:XOM) haven’t recovered – enterprise value to earnings before interest, taxation, depreciation and amortisation (EV/Ebitda) ratios are still low – suggesting the market is well aware of this.
The commodity’s demise may well be a drawn-out one, and some have said it’s too soon for investors to sound the death knell for the oil majors, but its eventual fate appears to be sealed.
Unreal estate
Back in the land of the living, will the property market ever cool down? We asked this question last Christmas and, somehow, we’re still asking it 12 months later.
The end of the stamp duty holiday in September, economic tumult and an expected rise in unemployment looked set to cause a property slowdown in 2021, if not an actual fall in house prices.
But prices are still rising – fast. According to Nationwide’s house price index, annual house price growth stood at 10 per cent in November. This is lower than June’s 13.4 per cent, but still towers above pre-pandemic levels. Meanwhile, concerns about widespread unemployment have (thankfully) not materialised and the race for space is still going strong as we find ourselves, yet again, ordered to work from home.
A slump might be getting nearer, though. The Bank of England is teasing us with the prospect of higher interest rates, for starters, which would make borrowing more expensive and houses less attractive for investors.
Property sales also seem to be seizing up: transactions in October plummeted to a nine-year low, which wealth management business Quilter said will “surely serve to drive prices back down, albeit slowly”. The sheer pace of house price growth compared with income growth is also expected to have a cooling effect.
But – much like Covid-19 – house prices are proving alarmingly robust.
The American dream
Even more rambunctious than the UK housing market are US equities. Last year, vaccine uncertainty, the threat of tighter monetary policy and economic turbulence seemed likely to darken the outlook for the US.
In reality, economic demand exploded and valuations are still extremely high: on 7 December, the S&P 500 and Nasdaq Composite indices enjoyed their biggest one-day gains since March. The US market has also outperformed the UK market, which is starting to look like something of a provincial cousin.
Whether all of the US’s valuations are sustainable remains subject to fierce debate. On the one hand, analysts are bullish, predicting that earnings per share (EPS) across the S&P 500 will grow by over 16 per cent in the year ending December 2022. But there are concerns that some companies – particularly those in the tech sector – are perilously overpriced. Electric vehicle start-up Rivian (US:RIVN) is one such stock. Valued at almost $100bn, Rivian has no meaningful revenue – and a notable lack of pick-up trucks.
Things might get choppier for US stocks. The Omicron coronavirus variant and the future direction of monetary policy caused a jittery start to the month, with the hint of rising rates causing stocks to slide. For now, though, perhaps we need a little more festive cheer.
Ho Ho Hospitality
Speaking of festive cheer, where have people been enjoying their Christmas drinks this year? Pubs looked to be in danger last December. The British Beer & Pub Association had warned that without extra government support measures, more than 30,000 pubs could go under, to say nothing of independent brewers. We also came to the conclusion that frugal habits could cause more people to settle on drinking at home.
For a time, this seemed needlessly doom-ridden. In November, Young’s (YNGA) pubs reported that revenue was back to pre-pandemic levels and the group reintroduced half-year dividends. Meanwhile, Mitchells & Butlers (MAB) returned to profit in the second half of FY2021, with sales nearly doubling.
But the emergence of Omicron could prove devastating for the hospitality industry. Pub, restaurant and hotel shares plunged at the start of the month and there have since been a slew of Christmas party cancellations. If events do go ahead, they are likely to be smaller affairs than originally planned.
The desire to frequent pubs and restaurants may not have waned, but the cloud of Covid has far from lifted. People are cautious – even if they’re still thirsty.
Europe’s green shoots
Amid last December’s pub-induced pessimism, there were some green shoots of hope. European large-cap stocks were one of them. Quality large-cap equities, we said, would benefit from cheap debt in 2021 and the relative unattractiveness of government bonds. EU recovery programmes to boost economic activity were also expected to help things along.
And they did. The EURO STOXX 50 rose by 20 per cent over the course of 2021, ahead of the FTSE 100 (which grew by around 12 per cent) but below the S&P 500 which shot up by over 26 per cent.
Some of our company-specific predictions were also borne out – although, as expected, Covid recovery proved patchy across Europe. Shares in materials science group Novozymes (Den:NZYM) rose by 50 per cent, for example, while Finnish energy company Fortnum Oyj (Fin:FORTUM) surged by 48 per cent.
European stocks have been out of favour in recent years. Hedge fund manager Sir Paul MarshalI, co-founder, chairman and chief investment officer of UK hedge fund giant Marshall Wace, recently described all European bourses as “more or less moribund, relatively speaking”. It seems, however – contrary to everything that teachers tell you at school – that low expectations can yield good results.
The cost of living
Inflation also had some surprises up its sleeve. This time last year, private sector forecasters and gilt investors were feeling relaxed, and we anticipated that inflation would only prove a minor problem. Did they – and we – get it seriously wrong?
By December 2021, the Bank of England thought the consumer price index (CPI) would have risen to 2 per cent. In reality, the CPI reached 4.2 per cent by October, while the retail price index – which is typically higher – stood at 6 per cent. The jump was significantly bigger than expected and lifted inflation to its highest level in almost a decade.
Surging energy prices are partly to blame, as is strong consumer demand and disrupted supply chains, which have caused the price of raw materials to rise sharply. What’s less clear is how inflation will affect equity investors. On the one hand, recent history suggests that above-target inflation can be good for equities, hitting no sector particularly hard. But despite the Bank of England’s hesitancy so far, persistent inflation could lead to higher interest rates, which in turn could hurt shares.
How long inflationary pressures will last is unclear. But if the past year has taught us anything, it’s that our inclinations can sometimes prove more pessimistic than reality.
