By Mark Barnes, PhD, head of investment research (Americas), and Christine Haggerty, research & analytics
It was a banner year for risk assets. Despite the relentless pandemic overhang and several risk-off stumbles, most equity markets tallied double-digit gains in 2021, and cyclically sensitive stocks strongly outpaced more economically defensive ones. Oil and other commodity prices surged. High-yield credit posted decent mid-single-digit gains in the US and Eurozone.
So-called “safe” assets had a rougher time. Government and investment-grade corporate bonds and gold generally ended the year flat or lower.
But there were some notable quirks in this tilt to risk. Large-cap stocks generally outperformed their more erratic smaller-cap peers, particularly in the US. Stocks and high-yield bonds in emerging markets significantly underperformed. And, the US dollar soared versus most of its developed and emerging-market counterparts, in contrast to its traditional role as the go-to haven currency.
Regional asset class total returns – Q4 and full year 2021 (local currency %)
Source: FTSE Russell. Data as of December 31, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
US and European stocks barreled ahead
The hands-down winners of the 2021 reopening race were equity markets in northern Europe (led by the Netherlands and Sweden, up 38.4% and 34.2%, respectively), Canada (up 28.6%) and US stocks (led by the Russell 1000). The latter index amassed a whopping 11-point lead over non-US stocks in 2021, while stocks elsewhere trailed non-local peers, particularly in Asia Pacific ex Japan and emerging markets.
Regional index returns relative to FTSE All-World ex local market (rebased, TR, LC)
Source: FTSE Russell. Data through December 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The Russell 1000’s global leadership in 2021 was largely an upshot of its outsized exposure to leviathan tech stocks, which outperformed (rising 31% globally) as investors continued to gravitate to companies with reliable growth fundamentals, particularly as the global economic outlook grew hazier later in the year. The prevailing low-rate environment also benefited growth stocks, as low or falling yields enhance their future discounted cash flows.
Technology, which makes up 31% of the Russell 1000 vs 14% for the non-US index, single-handedly accounted for 11.8 percentage points (or 45%) of the large-cap index’s total returns, dwarfing the industry’s contributions in other developed markets.
Regional technology industry contributions to FY 2021 total returns (%)
Source: FTSE Russell. Data as of December 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
As the time series below illustrates, the outperformance of large-cap technology and consumer discretionary industry groups has been a steadfast driver of Russell 1000 performance edge this year, with Big Auto and retailers lending a helping hand to tech hardware and software stocks over the past several months.
Select Russell 1000 sector returns relative to FTSE All-World ex USA sectors (rebased, TR, LC)
Source: FTSE Russell. Based on Industry Classification Benchmark (ICB) data through December 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
US large caps trounced small caps in 2021
Many of the same sector exposures also fueled the Russell 1000’s outsized lead over its small-cap counterpart last year. Once again, contributions from mega-cap tech hardware and software stocks explain the lion’s share of the difference. Big Auto also helped. But another major boost came from Big Pharma and medical equipment suppliers, which ranked among the Russell 2000's worst performers.
Top 10 sector-weighted contributors to returns ‒ FY 2021 (TR %)
Source: FTSE Russell. Data based on Industry Classification Benchmark (ICB) data through December 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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