2021 was a better year for many of us compared to 2020. We saw the world return to some semblance of normality, markets were stronger, and we were able to spend Christmas with our loved ones. As we enter the new year, we are all hopeful that we can go back to normality. Therefore, let’s have a look at the UK heading into 2022.
Firstly, let’s start with equities. Since the pandemic started in March 2020, we have seen an incredibly good rally from UK equities. A combination of generous fiscal policy, relaxed monetary policy, and earnings recovery saw equities recoup and exceed expectations throughout 2021.
This was reflected in the FTSE 100 growing 16.32% in 2021.
During 2022 we are likely to see monetary policy become tighter to tackle the higher levels of inflation and this has been reflected recently as interest rates rose to 0.25% for the first time in 3 years. A result of this may act as a headwind to higher growth parts of the market – such as technology, however, this should benefit more value-oriented industries such as banks. This could see a reversal trend to what we witnessed in 2021.
As the UK stock market tends to be more value-based, this could mean we see UK equities outperform the American market – something that has not happened since 2016 when the Sterling depreciated post-Brexit.
Fiscal policy is likely to remain supportive across the world and earnings growth is likely to remain sufficient preventing any significant disruption from Omicron. Volatility is likely to arise due to tighter monetary policy but generally, the outlook for equities remains encouraging.
Government bonds can provide good short-term protection in uncertain times. Gilts currently yield 0.70%, three and a half times more than the start of 2021.
Looking over the next ten years, it would be a reasonable assumption to think inflation will be higher than 0.70% given that it’s currently at 4.2%.
For this reason, we invest in inflation-linked government bonds, as a source to hedge against inflationary risk as they increase in value during inflationary periods.
Other Asset Classes
Finally, an overview of other asset classes – commercial property. Parts of the commercial property market (notably industrial and logistics assets) offer good levels of growth going forward. There is a huge supply/demand imbalance in the market which is driving capital and rental growth. This is expected to continue during 2022 and consumers remain confident over the long term as more and more commerce moves online.Back to blog