Top & Bottom Equity Funds Q4 2021

Updated: Jan 26

Against the backdrop of the resurgence of Omicron virus variant, we have seen many countries start to tighten their Covid-19 restrictions to limit the outbreak of the virus. However, investor fears were less severe compared to the previous outbreak of the virus due to the variant's low severity and high vaccination rates worldwide.

Shifting to the Asian market, the heightening of China's regulatory crackdown, the Evergrande saga, and a slowing growth outlook in China had dragged the overall market performance, where the indices such as Hang Seng and Hang Seng Mainland 100 was the most affected victim during the quarter (See Table 1).

With that being said, some equity markets still managed to wrap up the Q4 2021 with stellar returns while others delivered relatively weaker performances (See Table 1).

Table 1: Market indices performances in Q4 2021

Table 2: Top 10 performing equity funds

Unstoppable upward trend in U.S. equities, underpinned by stable recovery despite a fresh round of virus outbreak.

While the world had been on track toward full economic recovery, the emergence of Delta and the new-detected Omicron virus variant hampered market sentiment as investors worried that governments could tighten mobility restrictions and even reimplement lockdown measures to curb the spread of the virus. Despite the headwinds, certain markets, such as the United States, managed to carry over its economic and earnings rebound into Q4 2021, lifting equity markets to record highs. The stellar quarter for stocks came even as the Covid pandemic raged on, with variants like Delta and Omicron leading to case outbreaks throughout the quarter.

In fact, the overall gains in the U.S. equity market were robust as the market worries had largely subsided amid encouraging economic data. Despite the resurgence of the virus, the high vaccination rates lowered the possibility of lockdowns, giving way to some positive sentiment in the U.S. market.

In the meantime, low-interest rates and solid corporate earnings provided a foundation of support for equities. Earlier Q4 2021, we had seen some sign of market correction as investors sell-off their holdings following the change in tone of U.S. officials that the inflation is no longer transitory. With that, the fears of tapering brought forward and the rising possibility of earlier-than-expected rate hikes overshadowed the equity market. With that being said, the rally of U.S. equity markets was not impeded by such headwinds since markets had adjusted and fully priced in the negative factors. Instead, the U.S. equity markets continued to break record highs countless times over the quarter.

Furthermore, the majority of the U.S. companies' earnings reports for the third quarter topped expectations as the economy continues to bounce back from the coronavirus pandemic. Unsurprisingly, the quarterly reports were stronger than expected and didn't show signs of margin compression, powered by factors such as stable economic recovery and a low-interest rate environment. Overall, the equity markets were encouraged by strong results from the U.S. companies during the quarter. As a result, we observes that funds with significant geographical exposure to the United States made it to the top-performing fund's list and recorded decent returns in Q4 2021

Table 3: Bottom 10 performing equity funds

A sea of red in China equity market; worst performer throughout the quarter

In Q4 2021, China was the worst-performing market among the markets under our coverage, where the Hang Seng Index and Hang Seng Mainland 100 index capped off the quarter with-5.31% and -6.37% losses respectively (See Table 1). The miserable market downturn in China was mainly attributed to further regulatory tightening, the ongoing Evergrande saga, and a slowing growth outlook.

Throughout Q4 2021, we started to see the spillover effect of tightening regulatory measures in China market, where the several regulatory policies announced by China government in the prior quarter affected the earnings report of the China companies. For example, Meituan reported its largest-ever quarterly loss after taking a hit from the antitrust crackdown. Moreover, China's biggest social media and video gaming giant Tencent was also hurt by the regulatory crackdown, posting its slowest ever revenue growth.

Moreover, the ongoing Evergrande saga gripped the financial markets in the past few months amid fears of spillover effects around the world, although the Chinese government repeatedly sought to reassure investors. The contagion risks soared as the crackdown on Chinese real estate companies raised default risks and threatened a broader economic slowdown in China. In fact, the Chinese property sector fears spread beyond Evergrande, causing a large sell-off within China and across the Asia region.

Other than the regulatory crackdown and the Evergrande crisis, the resurgence of delta variant in China also dampened the market sentiment as it derailed China from a full recovery. Over the past few months, the outbreaks of the Delta variant prompted travel restrictions and lockdowns in some cities in China, rattling the economic activities and consumerism in China. In fact, the consumer spending growth was still far away from its pre-pandemic levels, as the fresh wave of the virus across the major cities dented households' sentiment while dousing investor hopes of a quick recovery in consumption and growth in China. On top of all that, Chinese equities were also dragged by the lacklustre economic condition in Q4 2021.

Although 2021 was an exceptionally bad year in China, we believe that the Chinese equity market outlook remain attractive in the long term. While the China economy is slowing down, we expect the regulatory pressure to ease and see some incremental loosening in the China monetary and fiscal policies. Lastly, we believe Chinese equities have likely bottomed, with the market already pricing in much negative news. As such, valuations have become more attractive now, which forms an opportunity for investors to accumulate more. Therefore, we continue to maintain a 4 Stars "Attractive" rating on Chinese equities.

Source: iFast Global Markets