Over the fourth quarter of the year, the developed markets continued to rally, providing global investors with another year of strong positive returns. Indeed, Wall Street continued to hit new all-time highs, completing a hattrick of positive annual returns, enjoying its best three-year stretch since 1999, and setting a near 90% return over the past 36 months
The continuation of accommodative central bank policy, strong corporate earnings growth, and the best year ever for global mergers and acquisitions helped to propel global markets higher throughout the year.
… until Omicron and inflation reared their heads
However, financial markets did have some headwinds to contend with, particularly towards the end of the year. The emergence of the highly-infectious Omicron variant and a significant rise in global inflation to levels not seen in decades combined to cause concern as 2021 was ending and the new year was getting under way.
These inflationary pressures have already pushed up the prices of essential goods (such as food), as well as the cost of transport and utilities: more than two-thirds of people around the world are now feeling the squeeze.
The central banks responded immediately: the Bank of England raised its interest rates from 0.10% to 0.25%, although it kept the total size of its bond-buying programme the same. In the US, the Federal Reserve Bank left rates unchanged. It did, however, announce a reduction in its monthly asset-purchase programme. In Europe, meanwhile, the European Central Bank left its main interest rates unchanged, while slowing the pace at which the quantitative easing programme implemented in response to the pandemic is being reduced.
Other economic challenges came in the shape of global supply chain bottlenecks as booming demand for goods outweighed supply. And labour shortages hit as the “Great Resignation” took hold, which saw record numbers of people leaving their jobs. Fortunately, we appear to be in a period of grace on both those fronts. Future bumps in the road, however, will be determined by the direction that Covid takes next.
In the US, President Biden finally signed the long-awaited US$1.2 trillion Infrastructure Investment and Jobs Act into law. This Bipartisan Infrastructure Bill sets aside US$550 billion in new spending, 49% of which will be allotted to upgrading the US transport sector – its ports, airports, railways, motorways, bridges and public transport services –, while 32% will go on improving its water and power infrastructure. The rest will go on the environment and funding for broadband access.
In Europe, wholesale gas prices have skyrocketed, further driving inflation. But the UK has been particularly hard-hit. It is one of Europe’s biggest consumers of natural gas (85% of UK homes use gas central heating), and a third of the country’s electricity is generated by gas.
UK energy prices are now expected to rise substantially over the winter months, adding to the financial burden that the consumer is already facing. But Chancellor Rishi Sunak has already indicated that there is a limit to how much help the government can give to offset soaring energy prices.
As is the case at the start of every year, various institutions, strategists and economists have shared their stock market predictions. But the market is a curious beast – a complex amalgamation driven and characterised by numerous factors. Hindsight, as they say, is twenty-twenty, but most predictions – inevitably – fail to come to pass.
That said, looking at financial assets in 2022, we believe portfolios will need to stay broadly diversified: Covid, inflation and changes to central bank policy are likely to affect market sentiment on a fairly regular basis. However, above-trend GDP growth and robust corporate earnings should justify maintaining an overweight asset allocation towards quality global equities. It will, however, be important to adopt an investment philosophy that preserves capital and grows wealth, while at the same time managing risk. This can be achieved by taking a long-term view and owning companies that can maintain their margins and which have strong balance sheets, healthy cash flow, rising dividends and pricing power.