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The stock market's up, but next year may be a lot more volatile

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While it wasn’t always plain sailing, 2021 turned out to be another solid year for most investors. Barring a major shock, the FTSE 100 and 250 should finish significantly above their January levels — up 12.18 per cent and 13.3 per cent respectively.

But even though stock markets were able to shrug off Omicron, investors can be forgiven for feeling less sure about what’s to come.

Increasingly stubborn inflation and record high valuations leave markets entering the new year in a more volatile position than many had hoped. So what might 2022 hold for markets and portfolios?

Barring a major shock, the FTSE 100 and 250 should finish significantly above their January levels ¿ up 12.18% and 13.3% respectively

Barring a major shock, the FTSE 100 and 250 should finish significantly above their January levels – up 12.18% and 13.3% respectively

First, it’s important to say that, when it comes to future predictions, investors should always be particularly wary.

For as long as investing has existed, there have been speculators falsely claiming to be able to spot the next big thing.

But expert views can be useful when it comes to spotting the larger trends that investors should keep an eye on. 

Top of the list for now is what economists call ‘monetary policy’ – or what most of us know as interest rates.

By managing baseline interest rates, central banks (including the Bank of England and the U.S. Federal Reserve) effectively decide how easily companies can borrow money.

If the cost of borrowing rises suddenly, it can dent profit forecasts and bring down share prices. As Garry White, chief investment commentator with wealth management firm Charles Stanley, says, adjusting interest rates needs to be managed carefully. 

‘Provided markets are briefed in advance and see rises coming, share prices normally remain stable,’ he says.

When rate rises come as a surprise — such as the Bank of England’s decision this month to hike rates from 0.10 per cent to 0.25 per cent — markets can panic.

As Mr White points out, this is particularly so for shares which trade at high-earnings multiples — including technology companies. 

That’s because their valuations are usually based on the assumption they can continue to borrow money cheaply.

Even so, he predicts a small market correction may give investors the chance to buy these popular shares — like Apple and Amazon — at lower prices.

However, inflation and interest rates aren’t the only potential worry for investors as we enter the third year of the pandemic.

Richard Hunter, from online investment platform Interactive Investor, points out there are still major questions about whether customers will continue to spend as they have so far. 

‘Consumer behaviour will have a noticeable effect on whether companies continue to make progress,’ he says.

While consumer confidence has held up so far in the pandemic (and even boomed for FTSE companies such as Pets At Home – up 59.90 per cent in two years), next year may be trickier. 

He points to the end of government support schemes (furlough, for example) which may leave people less willing to splash their cash.

Increasingly stubborn inflation and record high valuations leave markets entering the new year in a more volatile position than many had hoped

 Increasingly stubborn inflation and record high valuations leave markets entering the new year in a more volatile position than many had hoped

There are questions, too, about whether trends that accelerated in the pandemic will continue.

‘Investors need to think about things like whether the transition to online shopping is here to stay,’ he says.

It’s a point that will be familiar to anyone holding shares in fast fashion company Boohoo — which is down 63.82 per cent since January.

That said, investors should be careful about assuming everything is pessimistic. As the past two years have shown, portfolio gains are often made when forecasts are less certain — as over-performance rewards braver investors.

Stephen Yiu is manager of the Blue Whale Growth Fund, a popular equities fund that has ridden the tech boom of recent years. 

In the past three years, the fund has doubled investors’ money, making £10,000 worth £20,400.

He points to several market factors — including the rise in ‘cloud’ computing (platforms such as Google Drive that store our files online) — which he expects to continue next year. 

He cites Nvidia, a major holding for Blue Whale, as one example. The tech company is up 135.97 per cent this year alone and more than 1,000 per cent in five years.

While actively managed funds like Blue Whale Growth pick stocks they think will beat the market, they should always be balanced against other options.

In times of uncertainty, mixed-asset funds — such as Vanguard’s LifeStrategy range or BlackRock’s MyMap — can be a useful portfolio hedge. 

By combining a broad spread of the global stock market with more defensive assets (such as investment grade bonds), these funds are designed to withstand some turbulence.

So far, that has held up well. Over the past five years, for example, Vanguard’s LifeStrategy 80 has turned £10,000 into £15,450.

With a similarly balanced portfolio, investors should be spared the worst of future shocks — while still reaping the benefits 2022 should deliver.

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