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.