21 December 2021
This is the final issue of WeeklyWatch in 2021 – we’ll be back on Tuesday 11th January. Until then, may you and your families have an enjoyable, safe and restful break, and we wish you the very best for 2022 and beyond.
As has been customary this year, central banks across the world were focused on inflation last week. Since the COVID-19 outbreak brought the world economy to a halt in 2020, central banks have maintained stable asset prices thanks to low interest rates and other forms of support (for example, bond purchases). Nevertheless, with the current growth in inflation, many of them have started to taper down this support.
Last week the US Federal Reserve (the US central bank) announced that it would speed up the taper of its bond-buying programme – currently running at $120 billion per month. Officials said last week that the programme will come to a close in March instead of June next year, and that interest rates will be increased in 2022.
Mark Dowding of BlueBay Asset Management, a fund manager for St. James’s Place, wrote:
“It appears that market participants had adopted a cautious stance ahead of the Federal Reserve (Fed) meeting and, notwithstanding Powell signalling an early end to taper and a possible first hike as soon as May, equities rallied on the thought that there would be little new coming from the Fed until the end of Q1.”
“Intrinsically, risk assets are underpinned by still-abundant liquidity and low levels of long-dated bond yields. It seems that, unless or until these rise more materially, then investors will continue to allocate towards stocks on the basis that they provide a better inflation hedge than fixed income, as well as offering growth upside potential.”
A whole new world?
In other news, on Thursday, the Bank of England raised interest rates from 0.1% to 0.25% in a move that appeared to catch the market by surprise. Later that day, the European Central Bank stated that it would reduce its own bond-buying programme as inflation grows on the continent, while at the same time proposing that interest rates are unlikely to increase until 2023 at the earliest.
These changes indicate that the world economy is entering a new phase as the year ends, wrote Johanna Kyrklund from Schroders, a fund manager for St. James’s Place.
“Looking at our models, we are now entering a more mature phase of the economic cycle when growth momentum peaks and central banks begin to withdraw support. Against this backdrop, we expect equity returns to be more muted but still positive, supported by solid corporate earnings.”
Breadth of assets
In the meantime, the Omicron variant has given way to yet more uncertainty for investors – in the short term, at least. Naturally, the best way to tackle changing investment conditions is to invest for the long term with a well-balanced range of investments. With funds invested in a broad range of assets, their performance won’t heavily depend on any one outcome.