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WeekWatch -‘As they have been for much of the year, central banks around the world were focused on inflation last week’ Dec 21

WeekWatch -‘As they have been for much of the year, central banks around the world were focused on inflation last week’ Dec 21

This is the last issue of WeekWatch in 2021. We’ll resume service on Monday 10th January. Until then, we hope that you and your families have an enjoyable, safe and restful break, and we wish you the best for next year and beyond.

As they have been for much of the year, central banks around the world were focused on inflation last week. Since the COVID-19 crisis caused the world economy to stall in 2020, central banks have kept asset prices stable with low interest rates and other forms of support (such as bond purchases). However, with inflation now growing, many of them have begun moving to taper down this support in the future.

Last week the US Federal Reserve (the US central bank) said it will speed up the taper of its bond-buying programme, which is currently running at $120 billion each month. Officials said last week that the programme will end in March instead of June next year, and that they will increase interest rates in 2022.

“It appears that market participants had adopted a cautious stance ahead of the Federal Reserve (Fed) meeting and, notwithstanding Powell signalling an early end to taper and a possible first hike as soon as May, equities rallied on the thought that there would be little new coming from the Fed until the end of Q1,” wrote Mark Dowding of BlueBay Asset Management, a fund manger for St. James’s Place.

He added: “Intrinsically, risk assets are underpinned by still-abundant liquidity and low levels of long-dated bond yields. It seems that, unless or until these rise more materially, then investors will continue to allocate towards stocks on the basis that they provide a better inflation hedge than fixed income, as well as offering growth upside potential.”

Meanwhile, on Thursday, the Bank of England raised interest rates from 0.1% to 0.25% in a move that seemed to catch the market by surprise. Later that day, the European Central Bank said it would dial down its own bond-buying programme as inflation grows on the continent, but suggested that interest rates are unlikely to increase until 2023 at the earliest.

What these changes signify is that the world economy is entering a new phase as the year ends, wrote Johanna Kyrklund from Schroders, a fund manager for St. James’s Place.

She added: “Looking at our models, we are now entering a more mature phase of the economic cycle when growth momentum peaks and central banks begin to withdraw support. Against this backdrop, we expect equity returns to be more muted but still positive, supported by solid corporate earnings.”

In the meantime, the Omicron variant has introduced more uncertainty for investors, at least in the short term. Of course, the best way to deal with changing investment conditions is to invest for the long-term with a well-balanced range of investments. If your funds are invested in a wide range of assets, then their performance won’t be overly reliant on any one outcome.

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