The final quarter of 2021 was generally positive from an economic and market point of view, despite inflation concerns and the emergence of the Omicron variant.
Rising inflation above target levels following the reopening of the economy raised questions around whether central banks would raise rates to dampen spending. The message during most of 2021 was that inflation was “transitory”, driven by temporary, supply induced pressures. However, towards the end of the year it was recognised that inflation was proving stickier than expected.
The Bank of England raised the bank rate marginally from 0.1% to 0.25% in December, while the Fed gradually reduced their asset purchase programme. This reflected confidence in the ongoing strong, albeit slowing, economic growth and data suggesting that Omicron was milder than previous variants.
These policy changes caused negative returns for UK Gilts and UK Index-Linked Gilts over December, although over Q4 as a whole they were up 2.42% and 4.94% respectively, having experienced strong earlier performance.
The majority of Equity indices performed well, albeit with some volatility in November, with the US again leading the way returning 9.51% over the quarter. Europe and the UK also performed strongly. Japan ended the quarter down -4.91% in sterling terms, as the yen weakened versus the pound and the newly elected PM was less well received by markets. Meanwhile, macro concerns in China weighed on performance of Emerging Markets Equities.
The chart below shows the relative performance of Equity and Fixed Interest indices over the last 12 months, while highlighting the strong performance from Developed Market Equities, and positive performance from most asset classes.
Emerging Markets have been held back due to various factors. These include the greater impact of coronavirus due to lower vaccination rates, as well as particularly poor performance from Chinese Equities due to slowing growth, concerns over the overleveraged property sector and a government clampdown on tech companies.
With bond yields rising as investors priced in higher long-term inflation, the FTSE Actuaries Conventional Gilts All Stocks index was the lowest performer over the year with -5.16%. In terms of equities, the US has had another stellar year returning 27.48% in sterling terms, with the FTSE All Share returning 18.32%.
Q4 was a relatively strong end to a broadly positive but volatile year, as the risks of inflation and coronavirus continued to affect markets. As we enter 2022 there are reasons to be optimistic, but its important portfolios are rebalanced to take some of the profits from 2021 off the table and realign with your long term risk profile.
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