Selected Market Indicators for Periods to 31 December 2021

Financial markets finished the year and the month of December on a strong note despite being disrupted by COVID-19. With a slow start to the month due to a rapid rise in Omicron infections globally and an apparent shift by the US Federal Reserve (‘Fed’) to slow down the economy to guard against excessive inflation, global share markets recovered towards the end of December with the MSCI World Index returning 3.4%. Whilst early data has shown the Omicron variant to be more infectious than previous strains with increased evasiveness to existing vaccines, governments around the world have been hesitant to reintroduce hard restrictive measures to slow the spread. This has provided optimism to financial markets that global growth will continue into 2022, and not be burdened by severe restrictions driven by the new variant.

The Fed shook markets in December, stating they would cut back more quickly their substantial pandemic induced financial support, reducing monthly net asset purchases by $20Bn for Treasury securities and $10Bn for agency mortgage backed securities from December. The Fed commented that similar reductions will likely be appropriate each month. Projections are for three rate hikes from the Fed in 2022, likely starting in June.

The New Zealand share market had a difficult year in 2021, lagging its international counterparts for a considerable portion of the year. This was due to the Reserve Bank of New Zealand’s doing more to guard the country from excessive inflation compared to the rest of the developed world, as well as company specific issues with some of the index’s larger constituents.

The sharp increase in New Zealand interest rates caused the New Zealand Government and Corporate Bond Indices to struggle in 2021, ultimately weighing on the Bloomberg NZ Bond Composite, which dropped -5.7% over the year. Cash continued to provide mild returns, largely unaffected by the OCR changes.

Significant developments for December included:

• The Bank of England (‘BoE’) raised its main interest rate to 0.25% from 0.10% in December after surprising market participants in November when a widely expected rate increase never eventuated. This increase makes England the first big developed economy to increase their interest rate since the pandemic began.
• The New Zealand economy contracted by 3.7% over the third quarter, driven by the lockdown over the period. However, this figure was less than the 7% contraction widely expected.
• Global COVID-19 cases sky rocketed in December to new record highs, exceeding levels seen during previous waves with the US and parts of Europe taking the brunt of the cases. The effectiveness of vaccines as well as the spread of Omicron, which is believed to be less harmful than previous strains, is reflected in the lower mortality rate compared to earlier waves.