The FTSE 100’s 9% rise in 2021 does not tell the full story of what has been an extremely eventful year for investors. Indeed, the year has included a wide range of challenges, such as the ongoing pandemic and high inflation, that could continue to affect investment returns in 2022.
An uncertain outlook
In fact, it could be argued that the outlook for the stock market is more uncertain now than it was at the end of 2020. Of course, progress in vaccination programmes and an improving economic performance have contributed to upbeat trading conditions for many FTSE 350 companies over recent months.
However, at the time of writing, the prospect of additional containment measures in response to the Omicron variant remains present. With the potential for further variants following Omicron, this situation may persist throughout the early part of 2022. This could lead to heightened volatility for the stock market, as the operating environment for many businesses may remain subject to the path taken by Covid-19.
In addition, investors must now face a more uncertain monetary policy environment than a year ago. An era of low inflation has apparently ended. The Bank of England expects CPI inflation to peak at 6% by April. Whether it persists beyond then is a known unknown. However, the potential for rising interest rates following this month’s 0.15 percentage point increase is very real. They could be harmful to the stock market’s progress in 2022.
An evolving strategy
As a result of short-term uncertainty, it seems prudent for investors to only hold those businesses that have the financial strength to cope with relatively challenging trading conditions. Moreover, in an era where interest rates are likely to rise, concerns such as company debt levels and interest cover may return to greater prominence versus recent years.
Furthermore, the importance of diversification and the merits of avoiding overpriced stocks via a value investing strategy may gather pace. The stock market’s recovery following the March 2020 crash has arguably prompted a less cautious stance among investors that could quickly return should market conditions deteriorate.
Of course, short-term threats can provide long-term buying opportunities. Falls in the share prices of FTSE 100 members over the coming months may provide long-term investors with opportunities to purchase high-quality businesses at relatively low prices. Moreover, the global economy’s upbeat forecast growth rate over the coming years could allow a wide range of firms to prosper in a post-pandemic environment.
When that situation will arise is clearly a known unknown. So, too, are the effect of risks such as higher inflation, rising interest rates and changes in investor sentiment. However, investors who adopt a prudent, long-term strategy may be the ultimate winners in 2022 and beyond. While every year is a new experience for investors, the old principles of diversification, paying a fair price for stocks and purchasing high-quality businesses never seem to change.