As the COVID-19 pandemic continues to dominate the global outlook, markets face challenges on several fronts, including a tenuous global economic recovery, supply chain bottlenecks, and inflation. Here FactSet's experts weigh in on the events of 2021 across their respective subject areas.
U.S. Earnings: Analysts Expect CY 2021 Earnings Growth of 45.1%
The estimated (year-over-year) earnings growth rate for CY 2021 is 45.1%, which is well above the trailing 10-year average (annual) earnings growth rate of 5.0% (2011-2020). If 45.1% is the actual growth rate for the quarter, it will be the highest (year-over-year) annual earnings growth rate for the index since FactSet began tracking this metric in 2008. The current record is 39.6%, which occurred in CY 2010.
The unusually high growth rate for the year is due to a combination of higher earnings for 2021 and an easier comparison to weaker earnings in 2020 due to the negative impact of COVID-19 on a number of industries. All 11 sectors are projected to report year-over-year growth in earnings, led by the Energy, Industrials, Materials, Consumer Discretionary, and Financials sectors.
As we approach the end of 2021, European companies have gotten back into significant top-line growth compared to last year. On aggregate, the STOXX Europe 600 is expected to grow top line by 16%, up from the 14% growth projection back in September. This is a dramatic turnaround compared to 2020 when the STOXX Europe 600 on aggregate reported an 11% sales decline and more than 50% of the sectors saw negative sales. This year all sectors are back in black, led by Energy, which is expected to grow by 41%, followed by Basic Materials at 23%. Six out of the 11 sectors are showing double-digit top-line growth. On the bottom end, Telecommunications is reporting very modest sales growth of just 1% for the year.
U.S. Economy: An Economic Rebound Ushers in a Surge in Inflation
After surging by 6.3% (annualized quarterly growth) in the first quarter and 6.7% in the second quarter, U.S. economic growth slowed to 2.1% in the third quarter. But the overall strong growth numbers have largely been driven by soaring consumer demand for goods that has overwhelmed producers and global supply chains. This has led to a rapid increase in prices for producers and consumers alike. Consumer prices were up 6.8% in November compared to a year ago, the fastest pace since 1982. At the same time, the producer price index (PPI) for final demand increased 9.6% year over year in November.
To combat the elevated levels of inflation, the Federal Reserve announced this month that it will accelerate the planned pullback in monthly asset purchases. In addition, while the December FOMC meeting did not result in a change in the monetary policy rate, the Fed’s latest economic projections suggest that rates could increase to 2.1% by the end of 2024, with some Fed officials believing that this might happen by the end of 2023.
Fixed Income: Inflation Shaped by Supply Crunch and Labor Force Dynamics
The level and persistency of inflation caused by a combined supply crunch and shifting labor force dynamics remains the biggest surprise looking back at 2021. It’s critical to differentiate these two sources of inflation, at least in the near term. Over time, I believe that supply-driven inflation caused by supply chain delays and disruptions will ease as the virus becomes endemic. But there is no going back to a pre-Covid world.
I also believe that the consumer-driven inflationary surge is on its last legs as governments globally shift or withdraw support. We have seen a resetting of labor pool expectations and in the power dynamics between labor and business. As older generations forced out of work or into retirement during the pandemic continue to stay out of the workforce, the slack that is so critical to maintaining wage levels in a service economy has faded or disappeared entirely. There is a level of wage inflation that I think is permanent and will ultimately be distributed across the value chain.
ETFs: Active ETFs Buck the Passive Trend Plus an ETF Embraces Activist Proxy Voting
The key ETF trend this year was that a tiny but growing minority of U.S. investors are showing interest in actively managed ETFs. Actively managed ETFs captured 10% of net inflows, despite comprising only 3% of assets at the start of the year.
The biggest surprise for me this year was seeing shareholder voting power returned to fund investors with the launch of Engine No. 1 Transform 500 ETF (VOTE-US). VOTE-US offers investors a low-cost, passive portfolio with activist proxy voting. With the launch of VOTE, innovation in the exchange-traded fund (ETF) space just reclaimed the shareholder vote for those looking to put their money in environmental, social, and governance (ESG) focused investments. For more details, please refer to my recent Insight article.
Private Markets: Venture Capital Activity More Than Doubled in 2021
David Kremski, VP, Director of Private Markets
Globally, private market deal activity rebounded significantly in 2021 as investors adjusted quickly to the global pandemic. Specifically, venture capital (VC) total deal value more than doubled 2020 activity, with deals totaling $595 billion (through mid-December) vs. $290 billion in 2020. PE/VC dry powder remained at record levels, and over 700 private companies passed the $1 billion valuation mark (unicorn status) as compared to 275 in 2020. Private equity firms continue to raise more money and launch more funds as institutional investors increase allocations towards private markets strategies.
Not surprisingly, based on the lessons learned from Covid and the continuing contact restrictions, it is notable that the entire financial industry is ramping up efforts to improve digital client experience and self-service capabilities for end customers. This is occurring both in wealth management for private clients as well as in asset management for institutional clients. While there has always been a lot of talk about this and relatively little action due to low budget and priority up to now, there is a real change now in terms of RFIs (requests for information) and RFPs (requests for proposal) in the market to implement such services. We’re also seeing initiatives from asset managers to expand or even move into “direct-to-consumer” (D2C) business models, disintermediating the middleman, i.e., the traditional retail bank or wealth manager. This indicates very positive long-term impulses to kick long-overdue digital services to end clients into high gear, which will continue in 2022 and beyond.
U.S. IPO Market: SPACs Drive 2021 IPOs to a Record High
With just days left in the year, 2021 has already set new records for initial public offerings (IPOs) on U.S. exchanges. Through mid-December, FactSet data shows that 1017 companies have IPO'd on U.S. exchanges this year, well ahead of 2020’s 555 offerings for the full year. This year’s year-to-date volume is the highest number seen in FactSet’s annual data history going back to 1995; the previous high was 664 IPOs in 1996. The surge largely took place in the first quarter of the year as 453 companies went public; activity leveled off in the subsequent three quarters, averaging 188 IPOs per quarter.
IPOs by Special Purpose Acquisition Companies (SPACs) were a major driver of the 2021 IPO market. Sometimes called blank check companies, SPACs are companies that are created with the express purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. SPACs represented more than half (53.1%) of the year’s IPOs and 45.8% of the money raised in 2021 to date. However, given the growing regulatory and legal challenges facing SPACs, we’ve already seen a dramatic slowdown in SPAC activity over the last three quarters. The SPAC boom combined with a persistent low-interest environment has fueled merger activity this year; what happens if these go away?
South African Economy: A Double Blow: Civil Disorder and Lockdown
Under the twin pressures of tighter COVID-19 lockdown restrictions and a spate of civil disorder in July, as well as several other headwinds, South Africa’s GDP contracted by 1.5% in the third quarter of 2021. The contraction occurred as deadly riots in July spooked investors, with businesses looted and trashed in the Gauteng and KwaZulu-Natal provinces.
The slowdown in economic activity has had a negative impact on the labor market. According to Statistics South Africa, the number of employed persons declined by 660,000 to 14.3 million in the third quarter of 2021 compared to the prior quarter. This brought the unemployment rate to 34.9% in the third quarter, the highest number since the start of the Quarterly Labour Force Survey (QLFS) in 2008.
At the same time, the country is dealing with surging inflation. In November, consumer prices were up 5.5% compared to a year ago, the highest inflation rate in nearly five years. To combat the risks of rising inflation, on November 21, 2021, the South African Reserve Bank (SARB) increased the repo rate by 25 basis points to 3.75%, placing the prime lending rate at 7.25%. The decision marked the first rate hike since November 2018.
Disclaimer: The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.