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14th January 2022

Graham BentleyGraham Bentley

Welcome to 2022. From a health and well-being viewpoint, I trust you and your family have come through 2021 relatively unscathed. The last 12 months saw Delta, and subsequently the more contagious, but milder Omicron variant taking their toll to varying degrees. Their impacts have been mitigated dramatically by global vaccination programmes, and this latter phenomenon has had a major influence on investment sentiment, particularly during December. 

Bouts of volatility in the second year of pandemic

Viewed from an investment perspective, the second year of the pandemic certainly produced bouts of volatility, but for those who stayed the course, frankly it proved rather difficult to lose money. Anyone who bet the farm on Asia, China and the broader set of Emerging Markets – especially Latin America - might be nursing significant setbacks after charges. Those investors who sought to avoid risk by eschewing equities in favour of government and investment-grade corporate bonds, would have suffered a similar fate as most of the world’s central banks signaled interest rate rises against a background of rising inflation.

Entering the unknown

Unlike many investment managers, I’m not in the habit of making predictions about future events so I’m afraid I can’t calculate the level the FTSE 100 will reach by the end of December 2022. Most events are imaginable, but improbable – so-called ‘unknown unknowns’. There are more things that can happen than do happen, and portfolio managers cannot plan to avoid these. However, there is a huge set of potential outcomes, ‘known unknowns’ like interest rate policy and inflation trends, where managers will consider the range of possibilities, deduce consequences and organize their portfolios according to their conclusions, within the constraints set by the client or the investment objective of the fund or portfolio. This year, managers have four key risks to consider:

The persistence of Inflation

US inflation is approaching 7%, and over 5% in the UK. While global price rises can be blamed on temporary COVID-induced supply-chain problems, evidence on both sides of the Atlantic indicates record-high levels of job vacancies and rising wages for lower-paid workers, implying further price increases are likely as employers seek to maintain profit margins. In the UK, the proposed increases in National Insurance rates and energy prices may encourage higher wage demands, adding fuel to the inflation fire. 

Rising Interest rates

Despite COVID, many businesses (particularly US tech-companies) have significantly increased earnings against a background of cheap borrowing and high consumer demand. Stock markets have risen accordingly along with house prices, and US middle-class households’ net wealth is the highest in 50 years. Any perception of economic ‘overheating’ may require the US authorities to accelerate interest rate rises to make money more expensive, dampen demand and constrain price rises, thus stifling corporate earnings.


The market is behaving as if the worst is over; the consensus view seems to be that restrictions on social mobility will ease, and any new variants will be even less aggressive. Any obstacle to that progress is likely to increase market volatility.


Russia’s encroachment into Ukraine, and China’s increasingly belligerent attitude to Taiwan, are unlikely to escalate into a military confrontation with NATO and the US, however strongly punitive sanctions have been promised should invasions result. Russia’s importance as an oil and gas provider to Europe (it supplies 35% of Europe’s gas needs) allows it to threaten supplies – it may not be a coincidence that it demonstrated that ability in December, cutting supplies even as prices had risen by almost 800% over the year. China’s economic ‘clout’ may be debatable, but it holds over 13% of all the US debt owned by foreign countries, which is in turn a quarter of the total (the rest is owned by people in the US and the US Government). Any threat to repatriate that debt could see the dollar collapse. However, this in turn would see China’s competitiveness versus the US collapse too.

However, these scenarios pan out, 2022 may see the end of a 13-year period of negligible inflation, zero interest rates, and government support for stockmarkets through an interventionist policy of ballooning debt as liquidity has pumped into the system. But then again it may not! Despite 2021’s ups and downs, diversification remained the sensible strategy last year; even a ‘neutral’ portfolio, i.e. one where a portfolio equally weighted across the main equity and bond sectors, would have returned around 8.5%*. The Avellemy model portfolios targeting the middle of the risk range meanwhile returned up to three percentage points beyond that – a notable and gratifying result, and positive outcomes were similarly experienced right across the range.

And finally

Each year carries threats, but also opportunities. It also offers some lighter moments too; my favourite of 2021 was the revelation that Saudi King Abdulaziz presides over a £50 million prize money Camel Festival, featuring a beauty contest…yes, for camels. Last year, over 40 camels were disqualified for having ‘cosmetic enhancements’ – including botox injections.

Happy New Year, and let’s look forward to a safer, prosperous 2022.

* A theoretical diversified GBP portfolio comprising 50% in 6 equally-weighted Investment Association (IA) geographical Equity sector averages, 25% in IA Global and Sterling Bond sector averages, 12.5% Property Other Retail and 12.5% Targeted Absolute Return sector averages. Data sourced from FE Analytics, bid to bid performance period 01/12/2021 to 31/12/2021.


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