2021 was a positive one for investors in our Funds. Our Orca Global Fund returned 25.8%1, the Orca Global Disruption Fund returned 16.0%1, and the Orca Asia Fund returned 5.6%1. Stock markets rose overall due to the strong position of consumers after government stimulus, and the recovery of the economy as COVID concerns reduced.
December saw global stock markets return to all-time highs late in the month. Stock markets had dipped late in November, and investors took the opportunity to buy up in early December. Despite concerns around the spread of COVID-19 (Omicron), and little economic news, stock markets have been strong. We believe the underlying reason is still a combination of strong corporate profits and strong wealth levels with few alternative assets offering superior returns to stock markets.
January will be dominated by companies reporting their profits for the full year of 2021. We’d expect to hear that consumers are imposing their own restrictions on movements and activity, regardless of government policy. Supply chain issues should have subsided through the month, though in some industries there will be production limitations through the year. Companies have struggled to get employees hired and working due to high wages, sickness, and fear. Parts of the US have also been hit by a cold snap that has grounded flights and kept workers at home.
Finally, US government bond yields have recently hit COVID highs at 1.75%. This is a proxy for the alternative return for investors that view stocks as too risky. Investors are expecting the US Federal Reserve (Fed) to start raising rates in March 2022, which could shift the balance from stocks to bonds. Although this could be viewed as a negative for stock markets this year, the underlying reason behind rate rises is a strong economy, which is the biggest positive driver for stock markets.
We are taking a cautious position into January. Stock markets will be wary of rising interest rates, and it seems that further government stimulus is unlikely. We expect the banks to kick off earnings season with concerns around expenses, and for technology stocks to come up against high expectations and saturated markets. Bond yields should be higher than pre-pandemic, and we expect four rate rise from the Fed in 2022. All this points to some correction in more expensive stocks, particularly within technology stocks. We are overweight on lower risk, safer stocks, like pharmaceuticals, and manufacturers of consumer necessities.
With the Aussie dollar currently trading at close to 73 US cents we see a bit more downside than upside against the US dollar. We have less clarity about what the Reserve Bank of Australia will do in 2022, but they are unlikely to be as aggressive as the Fed, which will weaken the Aussie back towards 70 cents.
Despite our caution for January, we remain of the view that global stock markets are our preferred asset class, and that stock markets can return decent levels to investors in 2022. Firstly, the impact of rates on the stock markets will probably, in our view, be less than on bonds and alternative assets like crypto. Secondly, the interest rate adjustment is likely to be a one-off market shift early in the year, and then markets will be guided by company profit levels and the economy. Finally, when interest rate rises are driven by a strong real economy, as opposed to pure monetary inflation, stock markets benefit. We haven’t seen any weakness in economic data yet to suggest another recession is coming, and in those circumstances we favour stocks, although with a cautious approach. Thank you to all our investors for your support in 2021.