It is now almost two years since the pandemic gripped the world, devastating our lives and ransacking the global economy. But on the back of that devastation came a raft of fiscal and monetary stimulus packages. Provided by leading central banks around the world, these unleashed a wave of prosperity and a robust capex cycle, ushering in the fastest economic growth since 1984 and the best start to a financial bull market in living memory. And that’s not all: the lengthy lockdowns we have endured have meant that many people have become “accidental savers” and household savings ratios are at their highest for a very long time.
The UK is just one of many countries which have seen a record increase in currency and deposits held by households, and now that most restrictions have been lifted, economists are predicting a boom period of consumer spending which will doubtless help the economy.
However, as we look towards 2022 and beyond, the waters look set to become somewhat choppier. Global financial markets and their investors are going to have to do battle with the “Triple H” effect – higher interest rates, higher inflation and higher taxes. This, combined with the geopolitical risks generated by the world’s superpowers, will create more volatility and a turbulent investment backdrop for financial assets.
Inflation has now taken centre stage and is currently dominating the headlines, with many commentators suggesting that the central banks are behind the curve and will need to raise interest rates sooner rather than later. Inflation has actually barely featured in the developed market economies over the past 15 years – indeed, central banks have even been fighting off deflation with low to negative interest rates. All that has changed now. The International Monetary Fund is projecting higher Consumer Price Inflation (CPI), and rising costs attributable to climate change and supply chain bottlenecks. Inflationary pressures could well end up remaining stubbornly high for significantly longer than the central bankers and market are anticipating.
The economic scars of the pandemic can still be seen in a number of industries, particularly tourism and leisure. Even retail has been affected – although it was able to leverage the benefits and convenience of online shopping. But thanks to a successful vaccine programme followed by a booster programme that is finally picking up speed, the wounds inflicted by Covid are slowly starting to heal. But it is important to bear in mind that we are not out of the woods yet: the WHO has warned that Europe is once again the epicentre of the pandemic, and a number of EU countries have already reintroduced restrictions or are even back in full lockdown.
In the UK, since the relaxing of restrictions, the economic recovery has been rapid. People are gradually starting to go back to their offices and consumers have returned to the high street, spending some of the money that they accidentally put aside during the lockdown. The result is that there is now consensus among most analysts that the UK’s GDP will grow by a healthy 5% or so in 2022.
Uncertainty has been a defining feature of the last couple of years. As news of yet another variant roiled the markets on Friday, travel-related stocks in Asia were among the biggest decliners as investors anticipated the negative impact it will doubtless have on travel. It is still too early to say how long-term the effect of this most recent development will be. It could well prove to be just a storm in a teacup, but after the Wuhan debacle of March 2020, people are less likely to take chances.
UK share prices currently look rather cheap compared with other markets. And there are some attractive dividend yields on offer as well, alongside a number of other bargains to be had along the way. All of this means that long-term investors could do quite nicely by increasing their current UK asset allocations. That said, the UK’s weighting in the MCSI World Index is now down to just over 4%. This will inevitably act as a brake for those who have adopted a truly global approach to their portfolio asset allocations.
Unfortunately, as central bank policy becomes less accommodative and more margin compression becomes visible, corporate earnings growth is likely to slow down. This is particularly likely to happen if it becomes harder for companies to pass on those inevitable inflationary cost increases to consumers.
So with a changing investment backdrop as we enter the final weeks of 2021, our strategy going forward will still involve holding funds – and fund managers – that offer our clients a combination of quality growth and value companies with strong cash flows and healthy balance sheets, with secure and rising dividends. Equally important as inflation really starts to bite will be owning sensible businesses that have pricing power. What is certain is that next year will bring with it further disruption and technological innovation across all global sectors and business models. This is sure to create a plethora of new and exciting global investment opportunities – irrespective of any future macroeconomic or geopolitical turmoil that the world may have to withstand.