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2021 Wrap Up and 2022 Outlook

2021 Wrap Up and 2022 Outlook

It boggles my mind that we have started the third year of living with Covid. Many of us expected it would be more like SARS or MERS and it would have disappeared after a few months. But as we have recently realized, the latest variant surge is another humbling reminder of how unpredictable this thing is. It's ironic that the only constant about Corona so far is that most of the expert predictions about the path of the virus have been wrong. If in March 2020 we knew that we would still be dealing with the virus over 2 years later, with variants, continued lockdowns, travel restrictions, and nearly 5.5m officially deceased, I believe it is safe to say the panic and market consequences would have been even greater.

Throughout the Corona period, we have taken the opportunity to host numerous webinars via Zoom and have found this to be a major positive development for clients.  Our upcoming webinars, in English and Hebrew, will take place on the evening of 11th and 12th of January, to summarize the year 2021 and discuss 2022 Key issues and Outlook. Links to register have been sent to you separately.

2021 Market Performance

Q4 2021 market Diagram

The main message for 2021 is unchanged from about April. On a year to date, basis stock benchmarks, especially USA, are mainly strong positive, and conservative bond benchmarks are mainly negative. As a result, conservative portfolios have done less well compared to more aggressive portfolios. Some investors may be feeling frustrated when they look at the excellent returns of equities while their multi-asset class portfolios are quite far behind. We therefore strongly recommend that when making comparisons, one needs to compare "apples to apples".  In other words, one should compare a multi-asset class portfolio to a relevant multi-asset class benchmark that mixes stocks and bonds in the appropriate ratio.

Strong equity performance was in line with our predictions from December 2020. We thought risk assets would do well on the back of the Corona rebound, the "reopening" and the reflation trade (anticipating moderate inflation).  When long-term interest rates spiked in March, it was painful to see the risks on bonds materialize, and bond benchmarks go negative. Investors often expect advisors to change their mandates more actively. However, professional advisors primarily focus on the downside risk and need to work within the client's pre-agreed risk tolerance. 2021 performance highlights the asset allocation dilemma facing investors.

Asset Allocation Dilemma for Investors

Are bonds dead? No – absolutely not! However, the reality is that bond yields are so low that they are not interesting for most investors especially considering those returns are even less likely to keep up with elevated inflation levels. So why do we use bonds at all? You would only buy or continue holding bonds if necessary for risk management or governance issues. For example, certain pension funds must have a certain percent invested in government bonds, even if the best-case scenario is a negative return. Bonds' main advantage over equities is that they are more predictable because of the fixed coupon and fixed maturity date. More predictable, however, does not mean entirely predictable. It just means the range of predicted possible outcomes is much narrower than equities. Many private investors cannot tolerate or do not wish to experience the volatility of a pure equity portfolio, so bonds are used as ballast. This ballast is still valid as a risk management tool; however, one needs to have sensible expectations about what can be earned from conservative bonds. 

The mantra we have been repeating to clients who want to earn higher returns is increasing equity, increasing sophistication, or both. Sophistication means more complex investments like Alternatives (e.g., hedge funds, illiquid funds, lending funds, or equity-linked structured notes). Whereas a traditional conservative portfolio may have had 70% bonds and 30% equities, today, I would say that the asset allocation should be 50% stocks and 50% alternatives, assuming the reduced liquidity of the alternatives is appropriate and the increased volatility can be tolerated. As you can see, there is a real dilemma for conservative investors as taking on additional risk at various stages of life is not a simple decision at all. That means advisors will play an even more critical role in the future in risk management, asset allocation, and fund selection decisions and we are working hard to make sure we are equipped for those challenging discussions with clients.

2022 Key issues and Outlook

The key issues for 2022, in our opinion, are demand normalization, inflation, fed policy and China.

Demand Normalization- 2021 has seen an unprecedented surge in demand for goods. There are many reasons for this, including increased wealth in the developed world, changing spending patterns (less on services like restaurants and holidays), and government support packages. The result is supply chain chaos across many industries. This was exacerbated by supply restrictions due to Covid and labor shortages. As this settles down into a normalization of demand in 2022, it will impact all aspects of the economy, including growth rates, labor, and inflation. Some of this expectation is priced in to markets some industries we believe will still surprise.

Inflation - we currently have the highest inflation numbers we have seen for over 40 years. High inflation, high growth, and low interest rates are less of a problem for the economy than high inflation, high rates, and low growth. We think we will face a few years of the former. Our view is that inflation will come down in the next 6 months or so and will settle at a number higher than what we have seen but not at all low by historical standards.

Say, for example, the current numbers are between 6% and 7%, but in 6 months, if our view is correct, it should be around 3% to 4%. For the Federal Reserve to reduce inflation further from that range to their official target number of 2% may require steps that are very painful for the economy, and possibly markets, to bear. So perhaps they will let it run "hot" for longer in the hope it settles lower further on in time. This view supports increasing equities in your portfolio.

Federal Reserve Policy- for us, the most significant risk for 2022 will not be inflation itself, but how the Federal Reserve policy will respond to that higher inflation and how the Fed communicates this with the market. If the Fed has got their inflation predictions wrong and somehow push the panic button, this will be bad for all risk assets. If they keep to their long-term story and inflation settles to reasonable levels, we believe that will be good for equities and risk assets. This view pushes investors to take on more equity risk in their portfolios, as from an inflation point of view, it should be wiser to have more equities and fewer bonds.

China- We have always been long-term bulls on China and still feel it cannot be ignored in a global portfolio. A brief summary of the China debate is that either you believe that Chinese communist party politics will win, or market forces will win. I believe that market forces will win in the long term and therefore believe it belongs in the portfolio even at the cost of increased volatility and, for some, short-term losses. China did cost us some performance in 2021 (the opposite of 2020) vs. global benchmarks.


I believe 2022 will be a defining year for the Crypto space, with possible dramatic developments. I believe the two prominent leaders- Bitcoin and Ethereum- will survive the year, but it's impossible to say where the price will be. The extremely high price swings we have seen are likely to continue.  I do believe there is a natural price ceiling to Bitcoin and I do not subscribe to the belief that we will see prices grow another 10 fold or more as proponents claim. The argument that the finite number of 22 million Bitcoins, which are infinitely divisible, have infinite value is another Crypto bridge too far for me to cross.

Each year that Crypto survives and grows, despite having no tangible or intrinsic value, more and more investors are being pulled into the lure of insanely high expected returns. With a total market cap of over 2.5 trillion USD and growing investor acceptance, regulators are going to have to deal with this one way or another.

Regulating the Crypto world is going to be difficult. They will struggle with definitions and the way the blockchain mechanism works. When trying to understand the blockchain, imagine a digital variation of the game Monopoly where each player validates the other's purchase of a property card by recording it in a public ledger. In regular Monopoly, the Property Card is bought from the "bank" (centralized). In a blockchain Monopoly game, the property ownership is validated by all the players in a public ledger (decentralized). How do you regulate this? Who is responsible? Existing financial security legislation will be too complex and cumbersome for this space and designing new legislation will take a long time in a highly dynamic and super-fast evolving area.  Finding common definitions for the 8000 different Crypto's will be a complex challenge due to the space's global and "jurisdiction-less" nature. We do not include Crypto based products in our portfolios, but we do have a range of products available for those who want to be in this space.


Currency allocation for most wealthy families is a very tough decision and one where we see the most damage done due to poor planning and suddenly forced decisions. With a large part of our business based in Israel, we see that many immigrant clients, high-tech entrepreneurs, stock option winners, and other international families have placed too much money on one currency. The strong shekel has pushed many of these investors into an uncomfortable corner. As a rule of thumb for investors who live in stable countries, somewhere between 50% and 90% of your total wealth should be in your home currency, and too many people have failed to recognize Israel as a robust currency environment. Even if you did not believe the fundamental arguments that make the shekel so strong, why bet on one currency? Without the Bank of Israel intervention in the currency market, the shekel would be closer to 2.8 shekels to the USD, if not stronger. We suggest clients take a long-term strategic view towards currency and not play the tempting mental game, waiting or relying on luck.

You are invited to join our Q4 2021 webinar to hear a little more about these subjects. If you have any questions please feel free to contact our investment team at

The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this Review should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This Review does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this Review has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.

About the Author

Mike Ellis

Mike Ellis

Director and Chief Investment Officer

Mike Ellis, originally from South Africa, joined Pioneer in March 2000 after working in the Private Banking & Trust industry in the UK. At Pioneer he was the group CFO for the better part of the last decade. Today Mike serves as a director and is the CIO.

Mike is a Chartered Accountant, a CFA charter holder and received his MBA from Tel Aviv University & Kellogg Business School. Mike is also an Oxford University Alumni having participated in the Said Business School's Global Investment Risk Management Program. In addition, Mike is a licensed Portfolio manager by the Israel Securities Authority.

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