Market overview – Richard Carter, Head of Fixed Interest Research
Stock markets ended 2021 in buoyant fashion despite the rapid surge in Covid-19 cases worldwide. Mercifully, the hospitalisation rate has so far been relatively low compared to previous waves, so investors are hoping that further restrictions on activity will not be needed and the economic impact of Omicron will not be too significant. However, the likelihood is that inflation pressures will remain acute for longer with many employees forced to isolate, central banks are probably still on course to gradually tighten monetary policy as the year goes on.
Briefly looking back at last year, returns from equities were very strong once again with US indices leading the way, up by about 30% in Sterling terms. UK markets did lag behind somewhat, but still returned close to 20% while the big disappointment was emerging markets which were down slightly due in part to concerns about Chinese growth. It was also a tough year for bonds due to rising inflation with conventional gilts down by about 5%, although index-linked gilts made positive returns while Sterling investment grade credit was down by around 3%.
In the short-term, investors are likely to focus on whether Omicron has a major impact on economic data but so far it hasn’t really with most PMIs remaining robust, especially on the manufacturing side. Tensions between Russia and Ukraine are also likely to remain in the headlines.