December 2021

Economic Performance & Outlook

The best way to interpret the entry of the Omicron variant into our economic mix is to see it not so much as an outlier, but part of the process as we gradually extricate ourselves from the worst of the Covid pandemic. While this new variant is a damper on growth prospects for the moment, the outlook is still very much within what could reasonably be expected for the timeline of an economy moving forward from the trauma of Covid-19.

The received wisdom in the latter half of 2021 was that with a successful vaccination programme, the developed world had managed to contain the worst of the pandemic, and we were well on the road to normality. Clearly, this has proved too optimistic, with a significant increase in infection in November throughout Europe even before the onset of Omicron. As of today, we remain unclear about the health dangers of the new variant so, while governments are tentatively increasing restrictions – requests to tone down our socialising for example – the prospect of a strict lockdown for an extended period of time seems unlikely at this stage. This will of course change rapidly if health services become overloaded.

Leaving aside the threat of Omicron, it’s worth remembering that from a broad economic perspective, fiscal and monetary stimuli have meant that 2021 has been a year of remarkable recovery. And with the information that we have at present, 2022 is likely to see another year of supernormal growth. The fly in the ointment is what is happening around inflation, which is taking off much faster than any policymakers would have predicted a year ago. The inflationary surge is multifaceted, with higher energy costs particularly driving US prices forward. The US is also suffering from a labour squeeze, “the great resignation”, with 4 million fewer Americans employed now than at the start of the pandemic, even against a background of high demand for labour.

The question then that should vex every investor is how to manage our exit from the pandemic – it’s likely that the market will sway between positive news on a surging economy and rising profits, and worries about what will happen when policymakers withdraw the support that we have all become used to. In the end this transition will likely lead to lower asset prices, but as we have referenced above, predicting the timing is impossible.


Bond performance over past year
All bonds 10+ years, 16/12/2020 – 16/12/2021, local pricing

As we have often advised, the outlook for inflation is the primary driver for bond yields, so before any of our most recent worries about Omicron came to fruition, the market was particularly interested in data that seemed to show prices were rising faster than analysts had been expecting. Only a few days ago, the US government posted statistics showing that consumer prices rose 6.8% in November from the year before, the fastest annual pace in nearly four decades. The US and the UK have thus far taken a more aggressive approach to curbing inflation than the EU: the European Central Bank has ruled out raising interest rates in 2022, although the pace of quantitative easing will slow.

Both US and German 10-year government bond yields have retreated somewhat as the restraining grip of Omicron has tightened. However, in the grand picture this is but a temporary hold on yields.


Equity performance over past year
16/12/2020 – 16/12/2021, local pricing

You’d be hard pressed to think we are in the middle of a global pandemic if you looked at the performance of equities, which for key markets remain close to all-time highs. The reasons for this we have discussed before – the stimulus from governments propelling the economy forward, and the rapid ascent of sectors such as technology. Indeed, the US benchmark S&P 500 index posted its biggest weekly gain since February in early December – even against the early indications of the threat from Omicron.

European stocks have also had a stellar year in 2021, although have been giving up some of their gains since mid-November as investors show concern about the continent’s ability to cope with increased Covid infections.

While we think there remains room for equity gains in periodic bouts of enthusiasm, we also believe that asset prices will decline at some stage over the next couple of years.

European Property

With the continuation of the Covid crisis, and the consequent shift to online shopping alongside vacant city centres as people work from home, we still find it difficult to recommend property investment in the short term. As before, those clients who are below their target weighting should remain there for the moment.


Commodity performance over past year against equities
16/12/2020 – 16/12/2021, US dollars

While energy prices might be rising, we believe that the outlook for commodities overall is not hugely positive, especially given the ongoing concerns about slowing growth in China.

Hedge funds

Hedge fund performance over past year against equities
16/12/2020 – 16/12/2021, US dollars, hedge funds priced monthly

It has been difficult to see the advantage of hedge funds with stock markets climbing to record highs. However once markets do turn, as they must at some stage, we believe that the properties of these funds should come to the fore as their managers look to take advantage of ups and downs across various asset classes.

Currency Funds

Diversification is probably the most important principle in investing, and for this reason currency funds can be very useful. Investors should however expect some gains and losses depending on their particular holdings.

Global Tactical Allocation Funds

These funds, which grew in popularity after the financial crisis but have suffered somewhat from performance issues in recent years, are again a very useful means of diversification because of their spread across a number of asset classes and investment themes,

Senior Loans

These floating-rate, sub-investment-grade instruments have a strong covenant and a term of between 6 to 9 years. Investors are awarded with a premium because of their illiquidity and credit risk.