WeeklyWatch – Central banks sized up inflation and Omicron

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.

Stock Take

Taper time

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.”

He added:

“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.

She added:

“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.

Wealth Check 

If you’re in your 20s, 30s or 40s, your retirement may seem like a long way off. However, it’s especially important to take a long-term view on how your investments may play out.

It’s unhelpful to obsess over short-term swings in asset prices – by understanding that you’re investing for the life you hope to lead in several decades’ time, you can stop worrying about much of the volatility that can rattle markets in the short and medium term.

Your position on the risk spectrum can depend on many factors, including your personal views and risk appetite, your individual circumstances and financial objectives, and what your retirement plans are.

Targeting a specific return with certain investments used to be commonplace, yet it’s now possible to utilise a range of savings and investments to create different income streams in your later years. Indeed, your pension is likely to be the main source. But ISAs, investments, property and other savings could all form part of your planning.

What’s more, your risk appetite is likely to change over time as you gain different priorities in life.

The accumulation phase – in other words, when you build up savings and investments to use in later life – necessitates a different approach to the access (or decumulation) phase. In the latter, you’re asking your assets to work a lot harder, by providing an income while maintaining capital value, which may call for a different approach to risk. A Wellesley adviser can discuss your options with you and explain the trade-offs between risk and reward – thus helping you to formulate a plan that has your best interests at heart.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The Last Word

“You stay classy, San Diego.”

– Veteran broadcaster Andrew Marr signs off his 21-year BBC career using the catchphrase from ‘Anchorman’ character Ron Burgundy.

The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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