InvestmentsDec 23 2021

2021 – A tumultuous year for investments

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2021 – A tumultuous year for investments
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As we come to the end of yet another extraordinary year, we take a moment to reflect on the events of 2021 and what it has meant for multi-asset investors.

We have had levels of inflation not seen for decades, wild gyrations in energy prices and a move towards tightening monetary policy.

Yet it is the continuation of the Covid-19 pandemic that still very much dominates the macro debate and the thoughts of fund managers and financial advisers up and down the country. 

While 2021 marked the start of the much-welcomed vaccination programme, global coverage remains low. Indeed, throughout the year, we have also been battling new variants, including Delta and now the more infectious Omicron. It is this uncertainty that has led and is likely to continue to lead to elevated volatility in markets. 

Despite this, equity markets have continued to power on throughout 2021 and many investors including LGIM have benefited. 

We went into the year with a positive view on risk assets, as we were expecting a strong recovery in the second half of the year and a continuation of accommodative policy from central banks.

The impact on our portfolios

Inflation has managed to knock Covid-19 worries off the top spot for investor tail risks according to the Bank of America Fund Manager Survey and it has been hotly debated since.

There was a mixture of inflationary pressures building this year – the pace of the economic recovery, coupled with supply chain disruptions and loose monetary and fiscal policy.

This caused a spike in headline inflation prints across the developed world from decades of very subdued levels. Longer-term deflationary factors such as demographics, globalisation and technology remain strong but we have recognised the large element of uncertainty around the inflation outlook.

Therefore, some managers are beginning to diversify their portfolios outside of the core developed market of UK gilts, which typically is a sizeable holding within model portfolios. In wider multi-asset fund ranges, managers are not just investing in the US and Europe but into other developed bond markets like Korea, Australia and New Zealand.

The strong economic recovery and supply constraints have been very accommodative for energy prices this year, and despite some recent give back, the oil price has seen some of the strongest returns across all assets in 2021.

Continuing technology boom in 2021

Technology as a sector has been another area that has continued to work for investors in 2021. Many of these stocks have benefited from the acceleration of existing trends brought about by the pandemic, and as a result we have seen an increase in valuations for these companies, but not to levels managers are uncomfortable with yet.

They are however concerned about concentration of the big tech stocks in US equities, and some are deliberately reducing their exposure to broad market-cap US equities and taking positions in more diversified technology strategies.

Like previous years, China has continued to be a key focus for financial markets, as equities in the region and indeed emerging markets have faced many headwinds in recent times; including regulation, slow growth, property market challenges and energy shortages.

We expect an improving environment for these areas with increased policy support and growth.

Vaccine rates are slowly advancing, but it is far too early to jump to any conclusions about Omicron or future variants. Uncertainty therefore is likely to remain into 2022 and will probably feed into volatility in markets. As such, multi-asset investors and those investing in model portfolios alike need to be extra vigilant when looking to diversify their portfolios particularly in bond markets.

This need not come at the expense of taking select opportunities in certain areas, such as technology and commodities in 2021. Yet, in a few years’ time, when we look back, it is the potential policy pivot in China that may mark the end of the extreme underperformance of the region and other emerging markets. That could turn out be a significant turning point in global markets. 

Aimee Bowkett is MPS fund manager at Legal & General Investment Management