Setting off in a new direction?

Cathy Dixon
Cathy Dixon

AS we settle down into business as usual in this slightly altered world, it seems that we will have to learn to live with the new reality of Covid 19 for some years to come.

When the first indications of coronavirus appeared almost two years ago, few would have predicted that it would last so long, most of us thought a number of months would be the worst-case scenario and yet here we are entering the third year.

Few would dispute that our world has changed forever and there will be long-lasting effects from the pandemic such as the huge move towards working from home, which is likely to persist going forward.

Such flexibility is of course a positive in terms of the economy – previous pandemics have had a huge impact on the workforce and therefore economic growth: this time although 2020 was the worst year for the UK economy since 1921, estimates of growth in 2021 are around 6.9 per cent, which is the best year since 1941.

It is not likely to be plain sailing in the year ahead, however, the massive levels of support pumped into economies around the world are eye-watering and will take a long number of years to dissipate.

In the UK, for example, the government has spent £100 billion on furlough and the self-employment income support scheme. We are also facing an increase in the rate of inflation, the rise in energy prices is increasingly having an impact on us all and will likely feed through to more price rises.

Last week we saw the announcement that the US employment rate fell significantly in December. This has prompted expectations of a rise in interest rates in the next few months and possibly more rises later in the year. It is some years since we saw rising interest rates and while the hope persists that inflation will prove to be transitory, there are no guarantees that this will be the case.

Despite last week being a short week, there were also some dramatic moves in stock markets. There was a significant rotation from growth stocks to value stocks and in the US we saw oils rise by 9.8 per cent, banks by 8.6 per cent whereas software fell by 5.2 per cent.

This was reflected in the performance of the different indices: the technology dominated Nasdaq index fell a dramatic 4.46 per cent last week whereas the S&P 500 rose 3.82 per cent. Here we saw the FTSE 100 rise a more modest 1.36 per cent, with the best performances coming from airline group IAG and banking groups Lloyds and Barclays.

We have, of course, been here before, with the rotation being widely anticipated several times over recent months. It has been a roller-coaster ride over the past two years for the economy and the markets and if the first week of the year is anything to go by, it seems we are set to continue in this way. It is likely to be an interesting few months – Happy New Year!

:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.