As 2021 draws to a close, we sat down with Jonathan Sparks, Chief Investment Officer of UK & CI, as he looks back at the year that was and provides his perspectives on the past 12 months.
In the UK, despite the lockdown, the rollout of the vaccination programme quickly gathered pace, whilst the US welcomed a new, and some would say, more moderate, president. Markets clearly had a lot to juggle with and even more so when it became clear that the Democrats would also take control of Congress. That led to a certain bullishness on what the US could physically achieve, and that in turn led to an overall bullishness in the markets.
Trade in goods continued to bounce back, then, as the economy began to reopen it breathed life back into services too. At the same time as the vaccine rolled-out in the developed world amidst a push to get back to normal, we still had lots of policy and fiscal support. That essentially set the markets up for the rest of the year, particularly coming off a period of quite low inflation due to low energy prices in 2020.
But, as 2021 progressed, inflation started to pick up as the impact of restrictions on supply chains was realised. The blockage of the Suez Canal in March didn’t help, and it all served to underscore just how integrated – and fragile – supply chains are. That created a situation where there was largescale recovery and rising demand, but businesses were struggling with supply. And then we also started to see a big recovery in energy prices.
So, 2021 has been a year of quite rapidly ascending inflation, particularly from the middle of the year, when it became apparent that it was going to overshoot policy-makers’ targets – although it was still expected to be relatively transitory. Quite what ‘transitory’ means is something the markets continue to wrestle with. Signals from the Fed that it may actually be less transitory than expected, and signs that even with the winding down of Covid support measures, the economy has enough strength (and savings) to keep momentum going, are feeding into that watchfulness.
Sustainability in focus
Meanwhile, China’s latest Five-year Plan marked a policy shift refocusing on self-sufficiency in technology, and on sustainable growth – that is growth driven by productivity gains rather than by borrowing and spending on infrastructure. In part, these shifts meant that China’s contribution to global growth in 2021 was somewhat held back.
Speaking of sustainable growth, there’s been an obvious focus on clean energy through the year. November also saw the UK host COP26 and, with it, a renewed urgency to commit to more ambitious measures to tackle climate change.
Poised for 2022
We, of course, end the year with the emergence of the Omicron variant, which adds a level of uncertainty. As such, there has been a slight wobble from the markets in that reopening story. However, while it’s something to watch, it appears to be more easily absorbed by a market that’s increasingly familiar with shocks.
From an investment perspective, 2021 has taught us that there is still opportunity to capitalise on structural growth, for example, in clean energy. We’ve also learned that, even with inflation high, aggressive movement in rates is unlikely. The ‘stay invested’ message has really played out this year too. The early expectations of a strong rebound in earnings were correct and staying in the market has meant strong performance. Of course, that may mean that next year we won’t see that high growth and there’ll be more differentiation based on earnings, so perhaps investors will need to be more active in terms of their portfolios and strategies.
The ‘stay invested’ message has really played out this year too. The early expectations of a strong rebound in earnings were correct and staying in the market has meant strong performance.