Looking forward to 2022

My best friend from school was a skilful and driven individual who went on to become a very successful professional sportsman and he once told me that he never ever reflected on the past because if he did it would be at the expense of looking forward and that was where he was going.

In many ways I have adopted this state of mind and always try to look forward as I can’t influence the past, only what is going to happen in the future. However, a client recently pointed out to me how right I was with my 2021 predictions as outlined in our 2020 Christmas Newsletter. I am not prepared to break my rule and look back. However, that does not stop you checking what I predicted twelve months ago by clicking the link below;

Read last years blog here >> Bring on 2021 (quickly, please)

2021 was a year of rebound and recovery, and we expect that 2022, by contrast, will be a year of moderation-particularly when it comes to growth, inflation and investment returns.

Developed economies have spare capacity, households are sitting on accumulated savings from the pandemic lockdown and central banks are planning to remove Quantitative Easing only gradually. Overall, the global economy appears poised for a second year of above-trend growth, but at a slower pace than in 2021.

In our view, the three main uncertainties for 2022 are:

1. The duration of the spike in inflation

We expect the spike in inflation will not be permanent, although it could reach uncomfortably high levels in early 2022 before declining as supply-side issues are resolved. However, we are of the opinion inflation is likely to settle at higher levels than the last decade, but not troublingly so.

2. The impact of higher interest rates shouldn’t be overstated

Two factors to consider. First, there are more consumer deposits than there are mortgages – so there will naturally be some offset from higher interest income.

Second, the Bank of England’s data shows there are nine million owner-occupier mortgages in the UK, which is less than half of households. The majority (80%) of these borrowers are now on fixed-rate deals and the many of those are fixed for five years.

This is very different from previous cycles: rises in interest rates are only likely to hit the average mortgage borrower with a material lag. Anyone about to renew their five-year fixed-rate mortgage will be re-financing at a significantly lower rate than they are currently paying.

This trend will keep mortgage payments as a percentage of take-home pay significantly below the long-term average and in turn support the housing market. We do not see this changing unless interest rates move materially higher (above 2.5%).

We are not anticipating any significant rises in interest rates and whatever increases we witness they will have little impact on UK consumers.

3. Possible further COVID-19 lockdowns as infection rates increase again or new variants emerge

The world now understands its enemy far more clearly than it did back in March 2020. The virus will continue to evolve and claim lives, but it won’t fundamentally change society. The weapons that we use against it may be tweaked and adapted. Though we take confidence from the fact vaccines work and the virus is getting more transmissible but – hopefully – less deadly.

Certainly 2022 will see further challenges from the virus, a changing interest rate environment and lower corporate earnings. We’re ready for those challenges and remain extremely confident that our portfolios are built to last. We always hold true to the principle of maintaining a sensibly spread portfolio combined with an absolute respect for the preservation of capital.

Writing this article has made me reflect back on what else I learnt from my friend and it reminded me of how he approached taking a penalty. Very simply he broke it down into a simple repeatable process. He would first decide where he was going to send the ball (e.g. top right). Once the decision had been made he would never question the decision or change his plan, all his focus then turned to how he was going to celebrate the goal (the positive outcome).

For the record, whilst a professional and playing at the highest level he took 15 penalties and only missed 2.

We have adopted this strategy when investing, we do the research, we make the decision, we don’t allow ourselves to be subsequently influenced by noise, we simply commit and focus on the medium to long term plan, never taking our eye off the goal.

I’d like to take this opportunity to wish you and your loved ones an enjoyable festive season and may your 2022 be blessed with health, wealth and happiness.

Mark.

This article is not personal advice.