Paying close attention to the actions of central banks was one of the most common investment lesson investors ought to take from 2021, experts said.
With inflation rising, the Bank of England raised rates in December from 0.1% to 0.25%, while in the US the Federal Reserve has stated it will raise rates three times next year – something that at the start of 2021 would have been hard to forecast.
Alongside this, staying invested but being able to change your plans when events scupper them, were also key takeaways from 2021.
Below, Trustnet asked several market commentators what investment lessons they believe have been most important over the past year.
‘Central banks still run the show’
One of the biggest takeaways for investors in 2021 is that central banks still have a lot of sway over markets, according to Chris Ainscough, director of asset management at Charles Stanley.
Liquidity was the main theme in 2021, and central banks have been the main source of it.
Ainscough explained: “Embracing the ‘transitory inflation’ rhetoric through the first half, before pivoting towards the end of the year, the money taps were left firmly open which created a strong environment for risk assets.
“As a November bluff followed by a December surprise from the Bank of England demonstrates, second-guessing their actions is a tricky task, but the impact of them is key to market direction.”
‘Stay invested and don’t try to time the market’
Alex Harvey, portfolio manager and investment strategist at MGIM said: “This year has really been one about staying invested and not trying to time the market, which is notoriously difficult to do.”
After starting on a high after last November’s vaccine successes, the market has largely powered forward since that time.
Harvey said: “Anyone who sat on the sidelines waiting for a better entry point will be ruing that decision. We have had a handful of small drawdowns in equity markets this year, but these proved short-lived. It is better to stay the course and if you have capacity, buy the dips.”
“Earnings matter,” he added. “The post covid rebound has been pronounced and exceeded most people’s expectations. This is what has driven equity markets this year, not valuations.”
‘Expensive markets can always get more expensive’
Central bank liquidity is key, according to James Burns, co-manager of Smith & Williamson Investment Management’s Model Portfolio Service (MPS).
“There is a lot of noise, but that really is the biggest one,” he said. “Until that [liquidity] gets taken away from markets – which we can’t see for a long time – then risk assets will be well supported.”
This is why his investment strategy team has been continually emphasising the fact that liquidity will support asset prices.
“So whether you like it or not, central banks are not going to take that liquidity away,” he said. “And at the end of the day, that means asset prices will continue going up.
“That's obviously something we can look at next year, but again, it is still pretty accommodative. It would be foolish to go against it.”
Another lesson Burns said investors can take from 2021 is that expensive markets can always get more expensive.
“Even if QE stops and we get a couple of rate rises next year, they’re still going to be eye-wateringly low on a historic basis,” he said. “I don’t think the party necessarily gets stopped by that next year.
“Interest rates going up by 15 basis points [in the UK] is laughable on a historic basis, but people were getting excited about that. There’s still a long way to go.”
‘Easy monetary policy overpowers headwinds’
One lesson for investors from 2021 is that loose monetary policy can overcome the headwinds of rising inflation and debt levels, said Stuart Clark, portfolio manager at Quilter Investors.
“The last 12 months have taught us that in the face of extremely accommodative policy the market can go up even when there are significant headwinds,” he said.
“With extremely accommodative policy, it is possible to stir the inflation beast and that can be a difficult thing to tame – particularly when there are such significant debt levels across nations.”
He added that while asset prices have been rising, there is increasing inequality across the world due to the pandemic – which itself brings political risk back to the table.
He also noted the rise of the retail investor: “We have also seen a significant shift in retail risk appetite, particularly with the creation of meme stocks, and a willingness to use margin as way to express that.
“In the short term this makes it harder for fundamental analysis to add value and can lead to more extreme valuation metrics in certain areas of the market.
“Not unlike the mega-cap tech stocks, it is noticeable how much of an impact this is having on certain investment styles.”
‘Make all plans with a pencil’
If investors takeaway one thing from 2021, it is that even if one can accurately predict certain events, the outcome for markets can still be wrong, according to Aziz Alnaim, manager of the Mayar Responsible Global Equity fund.
“Imagine if a mysterious figure had approached you in December 2019 with news of the future,” he said. “In this future, a virus sweeps the planet and in response to the rising death toll, governments all over the world would mandate their citizens to stay at home and businesses to close.
“Government budget deficit in the UK will hit 15% of GDP and unemployment figures will be 5%. Many companies will record zero revenues for months. These conditions remain in place for all of 2020 and much of 2021, depending on the location.
“Given this information, the mysterious figure then asks you to predict the return of global equities for 2020 and 2021.
“With all this information, could an investor genuinely pick returns of 15% for both years? Yet this is what has transpired.”
He said this serves as a lesson to all investors that even if they can accurately predict a series of events, the outcome for markets can still be wrong.
Alnaim added that it is also a lesson that covid remains in charge and that it has changed the behaviours of producers and consumers alike.
“Some issues will be transient and others permanent,” he said. “It will take some time to establish which is which. Finally – make all plans with a pencil.”