Market update – December 2021

The pandemic is not over

Equity markets experienced their worst falls of the year as news emerged of Omicron, a Covid variant. While early data suggest that Omicron is less dangerous than earlier forms of the virus, it is worrying that the new variant has spread so rapidly in South Africa, which has high levels of immunity as a result of previous Covid infection. This suggests that the new strain may be able to bypass immunity, whether from previous infection or vaccination, and that it is probably already present in many other countries. This could turn out to be a brief jitter for markets, as was the case with the delta variant, but it could have more significant implications. Markets are likely to remain volatile as new information emerges over the coming weeks.

Fiscal policy picks up the baton from central banks

Central banks in developed markets are now well on the way to normalising monetary policy - and for now appear undeterred by Omicron. Fed Chair Jerome Powell even told Congress that current tapering plans, which will bring US quantitative easing to an end in mid-2022, could be accelerated. In the UK, interest rate rises will be very much on the agenda at the Bank of England’s mid-December meeting, even if they don’t actually happen until next year. More encouragingly for investors, political developments suggest fiscal policy will continue to support growth. Joe Biden’s $1.7 trillion Build Back Better bill, focused on welfare and climate change spending, is slowly moving towards approval. In Germany, Olaf Scholz’s new coalition government has set out plans to increase spending on infrastructure and climate change measures.            

COP26 a step in the right direction

COP26 failed in its overarching goal of achieving emissions reductions that would limit temperature rises to 1.5 - 2 degrees. However, the event in Glasgow still provided some grounds for optimism. It resulted in commitments that should lead to a significant fall in emissions over the coming years. And governments have promised to review their 2030 targets before next year’s COP in Egypt, which could bring commitments that get us closer to where we need to be. COP26 was not the game-changer many investors focused on climate change were looking for. However, additional momentum could also come from the recent spike in fossil fuel prices. It is a clear indication that the current pace of investment in renewable energy has not been enough to reduce our dependency on traditional forms of energy and that spending will need to accelerate.

Portfolio positioning

We are not yet taking any action in portfolios as a result of the Omicron variant. Given the uncertainty, we are not viewing this as a buying opportunity. However, it has not yet prompted us to lower our forecasts for economic and corporate earnings growth, both of which suggest maintaining exposure to equities. The economic uncertainty underscores the appeal of longer-term themes, such as energy transition, technology and healthcare. As we saw last year, these sectors can continue to do well even in the midst of a pandemic. It is also a reminder of the value of diversification within multi-asset portfolios and we continue to hold defensive and diversifying assets.