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UK and emerging markets are left behind in the ‘everything rally’


The so-called everything rally triggered by massive fiscal and monetary stimulus has left certain major markets behind while some previous winners have sagged recently, leaving investors to face a more complicated investment landscape in 2022.

Governments and central banks have since March 2020 rolled out multitrillion-dollar support packages to soften the economic impact of the pandemic. That nurtured a strong recovery and a record-breaking comeback for financial markets, which has been so broad that some analysts and investors have termed it the everything rally.

The MSCI All-Country World index of global stock markets is now on course for its third consecutive year of double-digit returns, its first such hat-trick in at least two decades.

Yet some entire asset classes and markets have remained notably more subdued, with UK and emerging market equities standing out as those that have largely missed the party. At the same time, as central banks prepare to unwind some of their stimulus to dampen inflationary pressures, a number of formerly buoyant corners have fared badly in recent weeks.

“The everything rally is a myth, it’s a misconception,” said Nikesh Patel, head of investment strategy at Kempen Capital Management. “The indices are going up but that’s hiding a lot of things underneath. There are a lot of ships sinking right now.”

An MSCI gauge tracking UK shares has risen about 13 per cent this year in US dollar terms, trailing the 17 per cent gain for the index provider’s broad All-World barometer, and the 26 per cent rise for the US benchmark as of December 28.

Chart showing UK shares have underperformed other global stock markets

This is not a new phenomenon. Over the past decade, the MSCI UK index has gained only 11 per cent in dollar terms, much lower than the 69 per cent gain for the MSCI Europe gauge. The MSCI US index is up 287 per cent over that period.

Including dividends — a big component of UK stock market returns — they have beaten European stocks this year, but still only delivered under half the MSCI Europe’s total return of more than 130 per cent over the past 10 years.

Although investors modestly increased their allocation to the UK in the past month, according to Bank of America’s latest fund manager survey, it remains by far the most disliked market, for reasons ranging from Brexit to the paucity of fast-growing tech stocks in the UK.

Yet even dowdier “value stocks” in less glamorous industries now trade at a discount in the UK, said Robert Buckland, global head of equity strategy at Citi. “The UK has become a sort of flyover stock market now,” he added. “If I’m a global fund manager and feeling twitchy about American stocks because they’ve done so well and look expensive, I’ll get on a plane at JFK and fly to Frankfurt or Hong Kong.”

Stock markets in the developing world have also fizzled badly lately despite the supportive environment and resurgent commodity prices, and have now suffered a woeful decade.

The MSCI Emerging Markets index started 2021 in fine form, climbing more than 10 per cent in the first two months of the year, but has since been dragged down by Beijing’s regulatory crackdown on several major industries, hurting many stocks that now make up a big chunk of the benchmark. By late December the index was down 5 per cent in 2021, depressing its 10-year gain to 34 per cent, below even the UK FTSE 350 gauge’s modest appreciation.

In commodities, the standout loser has been an asset that many investors would have expected to benefit from hyperactive central bank policy and quickening inflation: gold. The price of a troy ounce of the precious metal has dropped about 4 per cent this year.

Even in superficially rampant markets like the US, some areas have either failed to enjoy the rally, or come undone in recent months as central banks prepare to tighten monetary policy.

By mid-December almost one-third of stocks in the Nasdaq Composite had lost more than 50 per cent from their 200-day peak, according to Société Générale. Meanwhile, just five stocks — Apple, Microsoft, Nvidia, Tesla and Alphabet — contributed more than half of the S&P 500’s returns since April, according to Goldman Sachs.

Analysts say the potential for unloved markets to stage a comeback depends on whether inflation stays high, and how central banks respond. Few see a comeback for the UK, but some reckon emerging markets now look attractive.

JPMorgan’s equity analysts think emerging market equities will return 18 per cent in 2022 thanks to a combination of corporate earnings growth and fading fears that the Chinese regulatory clampdown will escalate and broaden. Many investors agree. BofA’s fund manager survey indicated that emerging market stocks are expected to produce the best returns of the coming year.

Yet the combination of still-robust economic growth, higher-than-normal inflation and stubbornly low interest rates mean that stocks overall are still the best overall bet, according to Wei Li, chief investment strategist at the BlackRock Investment Institute.

“We expect next year to be another ‘up’ year for equities, and ‘down’ year for fixed income,” she said.

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