KiwiSaver Monthly Update for the month ending 31 December 2021What’s the latest?
CEO and Founder Mike Taylor provides the latest on what worked and didn’t work in 2021, and what the plan is for JUNO in 2022.
What worked in 2021?
Despite vaccines being deployed globally, the year was once again dominated by Covid and the economic effects – inflation, supply chain constraints and labour shortages (which unsurprisingly are some of the same challenges that faced Europe after the Black Death in the 1300s). For investors in the 21st century dealing with the second year of a pandemic, being underweight bonds and overweight US mega cap tech stocks, like Tesla and Apple, was the most fruitful. And what didn’t work?Any exposure to Asian equities, particularly Chinese stocks; trying to time the market around Covid news; and sticking with some of the 2020 Covid winners, especially hardware beneficiaries like Peloton or JB HiFi. Also, after September high growth tech companies like Salesforce, Afterpay, Square or Docusign – many of which have fallen 50% from their 2020 highs.What’s the plan for 2022?
What we know. Short-term interest rates have already moved in NZ, but still have a way to go in the US. In NZ, 2-year rates are over 2% now but the US is still catching up, being around 0.85% at the time of writing. Tech valuations will likely continue to struggle under a rising rate environment. Cryptocurrency will again be volatile and provide plenty of headline grabbing opportunities. The Dow Jones will probably outperform the Nasdaq.What we don’t know?
How far can US (and global) interest rates go before the pain kicks in? Will Omicron be the last meaningful Covid variant that effectively ends the pandemic by the end of March and officially (from WHO) by June 2022? Will the Federal Reserve make a policy mistake or manage to thread the needle? They are not the oracle and history shows they are like an amateur rally driver constantly over-correcting.
What do I think will work in 2022?
My view for 2022 is that US tech will struggle with Fed policy and rates normalisation, but will present trading opportunities for specific stocks that get thrown out with the bathwater. Inflation will come off its high but remain above 2%. Equity performance will be split. US tech continues its current sell-off until valuations become more reasonable. But value, and Covid recovery names linked to services, will do well. Finance and energy should outperform.As usual, JUNO will navigate the shifting sands of the investment world, always striving towards our mission – helping grow your KiwiSaver account through active management and our one low fee, plus outstanding client service to provide an excellent investor experience.
Markets kick off new year with shaky start
JUNO Chief Investment Officer and Portfolio Manager Mark Devcich explains the latest in markets.
In December, the pivotal event was the Federal Open Market Committee (FOMC) meeting. The Fed announced it would accelerate the tapering of asset purchases and provide three interest rate hikes over the next year. Given the global economy's strength and elevated inflation, this tightening cycle is expected. The markets rallied on this outcome as uncertainty was taken away. However, the Nasdaq technology index lagged as technology and growth names sold off. Surprisingly the 10-year Treasury rate didn’t move until the new year.
Looking back in 2021 was a year where what worked in 2020 essentially didn’t in 2021. Internet, e-commerce, software, payments etc. were fragile and more industrial and cyclical names outperformed as the economy strengthened. We had too much exposure to the former and not enough to the latter in hindsight.
The pandemic follows a predictable outcome with new strains more transmissible but less potent; what is unpredictable is the government's response to them. I am optimistic that we will head back into a period of normalcy by the middle of the year, which should benefit travel stocks and those companies providing services that lockdowns have impacted.
Heading into CY22, we have seen a shaky start to markets so far, with a 10-year treasury rate increase above the peaks achieved in 2021, reaching 1.8%. The reduced liquidity scenario from the tapering of asset purchases and higher interest rates has caused pressure on high growth valuations. It is difficult to predict interest rates movements given the multitude of inputs that determine interest rates. Even if we could correctly, it would be more luck than skill and not repeatable. We prefer to get our edge in finding those competitively advantaged businesses and holding them so long as their moats are widening or at least stable, which reduces the frequency of decision making. This involves staying the course and knowing there will be a short-term valuation draw-down if interest rates increase, but share prices will follow earnings in the long term.
Information correct as at December 2021. Pie Funds Management Limited is the issuer and manager of the JUNO KiwiSaver Scheme. Click here for our Product Disclosure Statement. Any advice is given by Pie Funds Management Limited, and is general only. It relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees if you act on any advice. As manager of the Scheme we receive monthly fees that are determined by your balance and whether you are 13 years or over. We will benefit financially if you invest in our products. We manage any conflicts of interest via an internal compliance framework designed to ensure we meet our duties to you. For information about the advice we can provide, our duties and complaint process and how disputes can be resolved, visit www.junofunds.co.nz. All content is correct at time of publication date, unless otherwise indicated. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary. Please let us know if you would like a hard copy of this disclosure information.