At the start of 2021 we had some clear ideas on what we expected from the economy and markets. With pent-up demand real – consumers had pockets jammed with newly minted cash and a near-desperate urge to get out and spend – GDP would recover fast. We expected that, alongside staff shortages, to be one driver of non-transient inflation. We thought we might start to see the fruits of the hard labour many companies put in during the pandemic (to cut costs, digitalise, and strengthen supply chains) in the productivity numbers. Finally, we expected interest rates to rise a little (not as much as inflation, but a little); bond prices to fall (as rates rose); growth stocks (dependent on super-low rates for their high valuations) to fall and more value-orientated stocks (UK ones in particular) finally to make our fortunes.
We were right on much of this. The recovery in GDP here and in the US has been stunning. Wages have been rising and inflation is clearly not transient. A great productivity boom may not yet be upon us, but as James Manyika and Michael Spence note in Foreign Affairs, the pandemic has certainly “spurred” businesses to “radically rethink... operations” – accelerating plans for organisational innovation and adopting the digital behaviours that kept them going. Think telemedicine, the high street turning to e-commerce and self-service checkouts, and the drive for robotics in meat-packing plants: two-thirds of senior executives in the US say they have increased investment in artificial intelligence and automation since the pandemic began. There is an excellent chance we’ll soon see this in productivity (then profit) numbers.
On bond prices, we haven’t exactly been bang on. Normally, US inflation going to 6.8% would have had rates soaring. Not this time. The ten-year Treasury yield is 1.4%. The UK ten-year gilt yield is well under 1%. Those growth stocks that were supposed to collapse? Some of the worst of the loss makers have had a nasty year, but others are as expensive as ever. Gold has also failed (so far) to respond to inflation (it is supposed to go up). For more, listen to our end-of-year podcast (moneyweek.com/podcasts). But it is a reminder, as the FT’s Robin Wiggleworth says, that even if you had foreknowledge of every economic statistic coming in a year, you might still make the wrong bets. On the plus side, we have been wrong often enough to remember to diversify – and the results have been pretty good: on page 31, we look at the (satisfying) performance of our investment trust portfolio over the last decade. It has done well enough to worry us. Diversified multi-use portfolios are not meant to return 15%-plus a year.
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What of next year? We have no idea – about the only thing one can say about our age is that it is one of unpredictability, in which too much relies on government behaviour (in terms of Covid-19 policy in particular). Prediction is pointless. So we have – of course – had a go. Matthew Lynn picks his potential shocks of 2022 (mostly leadership-related); Max King gives his top trust ideas; and there’s our Roundtable – our panellists agree on some things (UK equities are cheap; buy before private equity does) and disagree on others (inflation…). More on all this in the new year. Meanwhile, enjoy our annual quiz.
A very Merry Christmas and Happy New Year to all our readers.
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