Investment Team

3 December 2021

The watchword for 2021 was growth, at least for the global economy and stock market. After the catastrophic global downturn experienced in 2020 as the pandemic gripped the world, things improved in 2021 as economies started to reopen. This was helped, in part, by central banks and governments pumping money into their financial systems and taking action to limit the damage, such as the furlough scheme and extra support for businesses. In some cases, this was so successful share prices registered all-time highs.

So, onto 2022. Now the shadow of the pandemic isn’t as long as it was, what will the economy look like, and how will it affect your investments, such as your pension?

Well, if 2021 was characterised by growth, 2022 is likely to be a defined by resilience. In financial terms, that means how well stocks and shares keep their value over the long-term. We believe the stock market might experience a bit of turbulence, but will still grow, although it’s unlikely to be near the levels of last year.

There are a few reasons why we think this. Firstly, the government help mentioned earlier is winding down or stopping in many places. Secondly, inflation levels are higher than they have been for a while, particularly in the UK and US. High Inflation is usually seen as a bad thing by the stock market because it increases borrowing costs and the price of labour and materials for companies, which then reduces expectations of growth by these companies.

The cost of living generally goes up too, so people tighten their belts. Add these together and it makes for a more challenging environment, although some industries are much more resilient to inflation than others.

Interest rate rises often follow in the wake of high inflation as a way of trying to keep it in check. Again, this can limit stocks and shares growth as borrowing money becomes more expensive for companies. However, it might not affect your investments straightaway, so you won’t always see an immediate change.

The spike in inflation is mainly down to the rapid economic recovery. As countries began to open up, people started to spend money they’d saved during lockdown, and infrastructure projects that had stopped started up again. And as demand increased for materials like cement and timber, suppliers struggled to keep up and prices soared. More bottlenecks to the supply chain occurred when the container ship Ever Given managed to lodge itself in the Suez Canal for six days, causing knock-on delays for several months as other container ships queued up behind it.

Staff shortages also played a part too, as many firms found it difficult to recruit enough workers.

Further issues that helped cause inflation to jump include the UK energy crisis, and shortages in computer chips affected the manufacture of new cars and many other electronic goods and devices.

Rebalancing with resilience

What all this means is businesses will need to paddle under their own steam without as much of a helping hand from government stimulus, and within an environment of higher inflation and, most likely, higher interest rates. This is where the resilience of stocks will come in, with those with the strongest finances and offering good long-term business prospects showing their true worth.

Investing in the stock market should always be looked at over the long-term (usually 5 to 10 years minimum), so it’s not unusual to experience different levels of growth and performance. The key is to always keep this in mind with your investments.

Of course, none of us have a crystal ball to actually see into the future. But as an investor, having a mixed portfolio with a range of assets included, is always important to protect against market volatility. When you invest in the stock market with a pension, for example, you’ll usually do so using funds which include shares from different companies. It might also be invested in bonds, property, and other types of investments. This mix of diverse shares and assets should help make your investment resilient as you go into 2022 and beyond.

Pensions are a long-term investment. The retirement benefit(s) you receive from your pension will depend on a number of factors including the value of your plan when you decide to take your benefit(s) which isn’t guaranteed and can go down as well as up. The value of your plan could fall below the amount(s) paid in.