We enter 2022 in the teeth of an unprecedented surge of Covid-19 infections. Yet one that is proving materially less deadly than previous waves.
It was clear as soon as the Omicron variant appeared that it was different and would change the shape of the pandemic. It is now clear that ultimately it is likely to accelerate the end, rather than prolong it.
For investors this is in one sense entirely positive. Economies are staying open and normal life may soon return to normal. This will enable the supply bottle-necks that have plagued companies to unlock themselves and hopefully facilitate consumers to spend some of the savings that have been accumulated throughout the pandemic.
Yet there is a sting in the tail.
Over the past two years we have seen our economies in the rich world propped up by an unprecedented amount of support from government spending and central banks. This helped many people but has undoubtedly fuelled the significant surge in inflation that we are now seeing, and which we are about to all feel in our bank balances when energy prices rise.
It was a period where the forces in society normally urging prudence with government spending, the Conservative Party in the United Kingdom and the Republican Party in the United States for example, largely abandoned this effort. However, the voices calling for restraint may have been silent, they have not disappeared. Indeed we may see the resurgence of these movements very soon if the UK government decides not to act to curb the large rises in energy prices we are likely to see. For UK consumers a 50% rise in energy prices is a big hit and we can expect significant political fall out from the decisions made around this issue.
As Omicron accelerates the end of the pandemic it is likely it will also accelerate the end of support. This is in evidence at the start of this year as the US Federal Reserve published minutes of its deliberations about interest rates. They were tough, foretelling rate rises sooner than many had expected.
For investors the key challenge is this. The moment when ordinary people are feeling inflation at its worst is the exact same moment that the market will begin to look through it and prepare for a world where central banks have crushed that inflation.
To position for that requires great care. Position too soon and portfolios will experience significant volatility. Position too late and portfolios will be full of assets that work when inflation is rising, but do not when it is falling.
It is our job to make that call with care. We are conscious of the need to scrutnise the data closely as the year develops and act with appropriate speed and precision when the time is right.
Overall, our view is that whilst in the real world 2022 has the promise of a year much more like normal life in the investment world we may expect returns to be more muted than in 2021, with active management required to capitalize on opportunities as they appear.
Managing Director © 2022 Alexander Beard All Rights Reserved
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