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Client Update - 10th December 2021

Somewhat ahead of expectations, Boris has revealed the first part of his “Plan B” to deal with COVID in the UK, and more crucially the new OMICRON variant. The news seemed, temporarily, to deflect from the Christmas Party debacle that was rapidly gaining momentum and infuriating many, across the country. For our part we will keep key workers in our offices, with their colleagues that can work from home, now being asked to do so from Monday. This is, however, a now well-rehearsed drill and I am sure it will not impede any of the services we offer our clients.


As the end to the year moves closer, market returns to date have reflected the reflationary phase the world economy has gone through. Best performers have been equities, mainly US, whilst the worst performers, generally, have been long-duration bonds whose return profile is the most sensitive to change in interest rate expectations. The difference in total return between the S&P Growth index and the US Treasury 10-yr plus index has been 30%. History suggests that the gap will not be as big next year – there could be some mean-reversion in relative returns.


On a more secular theme, responding to climate change is going to become increasingly important for investors. While there were a lot of good things to come out of the COP26, the key takeaway is that there is no guarantee that the world is on a path to stop the rise in atmospheric temperatures exceeding 1.5 degrees celsius by 2050. Thus, both physical and transitions risks will become more material for companies and investors. If we are a long way from global temperatures peaking, extreme weather events and environmental disasters are likely to be more frequent. Investors are exposed to losses resulting from these events impacting on businesses through damage to physical assets, disruptions to production and distribution, and increased costs through insurance and mitigation requirements. In addition, because we are not on the right path yet, the transition risks will build as there will be more urgency from policy makers, increased pressure on business models from investors and consumers, and from the technology needs required to shift to low carbon.


Diversification and managing carbon risk are two principles for investing we will focus on more in the coming years. There is a need for protection as well, from inflation being higher and thus eroding real returns, and from the potential for a policy driven re-rating of assets. While supply issues may subside, the energy transition could continue to provoke bouts of higher inflation. Regionally, Europe is less at risk from endemic inflation and monetary tightening than the US, and certainly on the equity side there is a valuation advantage in European stocks. Lastly, we wonder if the value trade next year could be one driven by a recovery in Asian asset values, but this is quite dependent on a better vaccine uptake in emerging markets.


The most bullish development in 2022 would be something that created an end in sight to the pandemic. As mentioned earlier, vaccination rates in emerging economies need to be significantly increased to prevent the opportunity for additional variants to take hold. There are very few countries with more than 80% of their populations being fully vaccinated. More worryingly there are many emerging economies where vaccination rates are well below 50% - including populous nations like Indonesia (35.3%), Russia (39.6%) and South Africa (24.65%) – data compiled by “Our World in Data” from national and international agencies. It really makes one think about international co-operation to deal with climate change being feasible when there is a collective failure to deal with something that we already have the tools for and experience of doing. If this does not change, then there will be more waves of the disease, more impact on global trade and activity, and a growing risk of stagflation which would be extremely negative for investment returns. The breakthrough of vaccine developments in 2020 was a major fillip to markets – in 2022 we need to see real progress on the rollout of jabs to achieve global immunity and a real and more equal expansion of global wealth.


It has been a pleasure writing the weekly updates to our group clients over the year. I will now take a break from these updates over the Christmas period and I will write again in the New Year. On behalf of all of our staff, we would like to thank you, our clients, for your support over the year and we very much look forward with keen anticipation to 2022 as we continue to move through the pandemic together. Have a lovely Christmas.

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