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20 January 2022

Quarter Four 2021 Market Update

After a reasonably flat third quarter, global markets rebounded and produced strong gains in the final quarter of 2021. The so-called 'Santa rally', an apparent bull run in stocks towards the end of each year, was once again in full swing with US equities leading the way, up nearly 10% during Q4, with Europe and the UK up just over 5% each. This came despite a far more uncertain economic landscape, with the Omicron variant of COVID-19 causing an exponential increase in cases globally. However, investors seemed to be less concerned with the new strain of the virus with its lower mortality and hospitalisation rates, when compared with the Delta variant, giving hope that this will lead to fewer and less severe lockdowns.

China was the only major market to experience declines, continuing its trend of significant falls throughout 2021. MSCI China was down almost 6% during Q4, owing to a continued lack of interest from foreign investors thanks to uncertainty and instability over the country's economic, social and business policies. In the US, inflation figures have continued their spiral upwards, ending the year at 6.8%, the highest level since 1982. Persistent, high inflation has started to cause a harmful reduction in real earnings, as higher wages are often offset by much higher prices. The Federal Reserve has thrown its hat in the ring to help ease pressures, signalling three interest rate hikes by the end of 2022 and a faster easing of bond purchases to help tame inflation. Central bankers across the globe have continually stated that the recent surge in prices is 'transitory' and will soon return to their 2% target, however, with persistent 4%+ readings now the norm for several months, many are wondering how long 'transitory' really is.

In the UK, the threat of the Omicron variant has been targeted by a Government-led campaign to offer booster vaccines and encourage the non-vaccinated to get their shots. The collapses of various providers in the household energy supply sector continued during the final quarter of 2021 and has now affected 4.3m households. In mid-December 2021 there was an adjustment to the Base Rate from 0.1% to 0.25% as a measure to help combat inflation with the the Consumer Prices Index including owner occupiers’ housing costs (CPIH), rising by 4.6% in the 12 months to November 2021, up from 3.8% in the 12 months to October 2021.

The outlook for markets remains fairly uncertain. On the one hand, corporate earnings remain strong and in high growth territory, with a milder variant of COVID-19 good news even if it can spread more quickly. On the other hand, markets at all-time highs and the risk of further lockdowns offer a heightened risk and reward profile for investors.

As with the last 24 months, 2022 is likely to continue the trend of uncertainty in financial markets, with no definitive end in sight for the COVID-19 crisis. The effects on supply chains, inflation and social gatherings, amongst others, are unlikely to subside quickly and may continue for some time.

The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
Quarter Four 2021 Market Update
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