Developed market equities continued to rally in the last quarter of 2021, providing investors with strong positive returns for a third year in a row. Government bond returns were mixed over the year with US and UK markets now pricing in rising inflation and a faster pace of interest rate hikes.

The emergence of the Omicron variant led to a spike in equity market volatility at the end of November, but markets quickly recovered as data from South Africa and the UK indicated a lower risk of severe disease.  Current corporate earnings strength and the prospect of further growth in 2022 outweighed the risks surrounding COVID.

The rapid increase in infections towards the end of 2021 did however begin to impact global economic growth prospects.  The fear of weaker future growth due to projected central bank policy normalisation led to a flattening of the US yield curve, and uncertainties weighed on the performance of large cap stocks.  The fall in December’s services purchasing managers’ indices in the US, the Eurozone and the UK indicated that the service sector is losing some momentum, however global manufacturing sentiment is relatively resilient despite supply constraints and rising input prices. This bodes well for corporate earnings which are more closely linked to manufacturing than services and the less damaging than anticipated effect from Omicron compared to previous variants should be positive.

In the US, President Biden signed the Infrastructure Investment and Jobs Act, a $1.2 trillion infrastructure bill allocated to upgrading America’s transportation sector, water and power infrastructure, broadband and the environment. Strong performance from financial assets and real estate along with elevated household savings means the US consumer may have significant strength going forward.

Inflation remains a key issue.  In December, three of the four major developed market central banks indicated that they have greater concerns about inflation heading into 2022 than about the potential economic disruption from the Omicron variant.  US inflation increased to 6.80% year on year in November which is the highest level in 39 years while unemployment fell to 4.20%.  The current Federal Reserve target interest rate will be maintained at a range of 0.00% to 0.25% however there are plans to accelerate the tapering of asset purchases in the first quarter of 2022, with three interest hikes expected in 2022.  UK inflation (CPI) rose to 5.10% year on year and unemployment fell to 4.20%; a new record in job vacancies is a clear indication of increasing labour market tightness.  The Bank of England raised interest rates by 0.15% to 0.25% in December.

In Europe, an unreliable supply of Russian gas and falling investments in thermal energy led to a sharp rise in gas and electricity prices, which contributed to rising inflation.  The European Central Bank confirmed that the pandemic emergency purchase programme would end in March 2022 with the first interest rate rise expected towards the end of the year.

China is heading in the opposite direction to the US and UK, with the People’s Bank of China showing an easing approach while staying cautious on the level of leverage.  In 2021, Chinese equities significantly underperformed global equities, contributing to the c. 25% underperformance of emerging market equities compared to developed markets. More supportive fiscal and monetary policy and a less restrictive regulatory environment should provide a better backdrop for China in 2022.  The long term growth and investment outlook for emerging markets in general remains attractive, however the prospect of higher US interest rates could continue to be a headwind.

Due to the spread of Omicron, the first few months of 2022 may be challenging for the global economy as continued pandemic-related restrictions could coincide with disappointing economic data.  It appears that the market has been willing to look through the near-term risks as indications of the severity of the virus have been encouraging but any disappointment could lead to increased market volatility.

The prospect of another year of strong economic growth and rising corporate earnings may bode well for equity markets however some of the key risks to watch closely include Omicron, geopolitical tensions, structural inflation threats and importantly normalising fiscal and monetary policy.  This scenario could support a rotation towards more economically sensitive areas with lower valuations including banks, healthcare and natural resources.  Persistent inflationary pressures and the prospect of higher interest rates would continue to be a headwind for fixed income markets.


Market Performance


2021 Total Returns
FTSE All-Share +18.32%
FTSE World ex-UK +22.23%
FTSE Actuaries UK Conventional Gilts All Stocks -5.16%
FTSE Actuaries UK Index-Linked All Stocks +4.16%


Total returns in GBP to 31/12/2021



Key Rates  
Bank of England Base Rate 0.25%
Inflation (Retail Price Index)* 7.10%


* November 2021

Source of data: FE Analytics,,

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.