While it wasn’t always plain sailing, 2021 turned out to be another solid year for most investors. Barring a major shock, the FTSE 100 and 250 should finish significantly above their January levels — up 12.18 per cent and 13.3 per cent respectively.
But even though stock markets were able to shrug off Omicron, investors can be forgiven for feeling less sure about what’s to come.
Inflation is becoming more stubborn and valuations at record levels have left markets in a volatile spot than people had expected. How will 2022 affect markets and portfolios in the future?
Barring a major shock, the FTSE 100 and 250 should finish significantly above their January levels – up 12.18% and 13.3% respectively
First, it’s important to say that, when it comes to future predictions, investors should always be particularly wary.
Since the beginning of investing, there has been fraudsters claiming they can spot the next great thing.
However, expert opinions are useful in spotting larger trends investors should be aware of.
Top of the list for now is what economists call ‘monetary policy’ – or what most of us know as interest rates.
The Bank of England, the Bank of America and the Federal Reserve of the United States can control the base interest rates at which companies may borrow money.
The sudden rise in the cost to borrow can impact profits and cause shares prices to drop. Garry White, Chief Investment Commentator for Charles Stanley’s wealth management company, states that it is important to carefully adjust interest rates.
‘Provided markets are briefed in advance and see rises coming, share prices normally remain stable,’ he says.
When rate rises come as a surprise — such as the Bank of England’s decision this month to hike rates from 0.10 per cent to 0.25 per cent — markets can panic.
As Mr White points out, this is particularly so for shares which trade at high-earnings multiples — including technology companies.
That’s because their valuations are usually based on the assumption they can continue to borrow money cheaply.
Even so, he predicts a small market correction may give investors the chance to buy these popular shares — like Apple and Amazon — at lower prices.
However, inflation and interest rates aren’t the only potential worry for investors as we enter the third year of the pandemic.
Richard Hunter from Interactive Investor points out that there is still a lot to be asked about customers’ willingness and ability to continue spending as much.
‘Consumer behaviour will have a noticeable effect on whether companies continue to make progress,’ he says.
While consumer confidence has held up so far in the pandemic (and even boomed for FTSE companies such as Pets At Home – up 59.90 per cent in two years), next year may be trickier.
He cites the possibility of people being less inclined to spend their money on government assistance programs (furlough).
Increasingly stubborn inflation and record high valuations leave markets entering the new year in a more volatile position than many had hoped
Questions remain about the sustainability of trends seen in the pandemic.
‘Investors need to think about things like whether the transition to online shopping is here to stay,’ he says.
It’s a point that will be familiar to anyone holding shares in fast fashion company Boohoo — which is down 63.82 per cent since January.
Investors should not assume everything will turn out well. As the past two years have shown, portfolio gains are often made when forecasts are less certain — as over-performance rewards braver investors.
Stephen Yiu, manager of Blue Whale Growth Fund is a well-known equities fund which has taken advantage of the current tech boom.
In the past three years, the fund has doubled investors’ money, making £10,000 worth £20,400.
He points to several market factors — including the rise in ‘cloud’ computing (platforms such as Google Drive that store our files online) — which he expects to continue next year.
Blue Whale is a large holding company for Nvidia as an example. The tech company is up 135.97 per cent this year alone and more than 1,000 per cent in five years.
Blue Whale Growth is an active managed fund. They pick stocks that they believe will outperform the market. However, it’s important to keep them in balance with all other options.
In times of uncertainty, mixed-asset funds — such as Vanguard’s LifeStrategy range or BlackRock’s MyMap — can be a useful portfolio hedge.
This fund is designed to endure some fluctuations by combining the broadest possible stock market coverage with investment-grade bonds and more defensive assets, such as investment grade bond.
This has been a good result so far. Over the past five years, for example, Vanguard’s LifeStrategy 80 has turned £10,000 into £15,450.
With a similarly balanced portfolio, investors should be spared the worst of future shocks — while still reaping the benefits 2022 should deliver.
moneymail@dailymail.co.uk