Despite Omicron variant led to spike volatility at the end of November, equity markets rallied over the 4Q, mostly driven by earnings growth, ending 2021 as the 3rd year in a row of strong returns. However, fixed income were flattish, as rising inflation and a more hawkish speech from central banks on monetary policy weighed, leading most yield curves to flatten.
For 2022, with CPIs jumping to its highest reading in more than 30 years, three of the four major central banks outlined they are more concerned about inflation than the economic disruption that could cause the Omicron variant. We will have to stay broadly invested in high quality companies both through equities and bonds as usual, and while the hit from Omicron can be short-lived, we see another year with above average GDP growth and rising earnings, still justifying an overweight to equity risk in the portfolio. As for fixed income, with inflation being a challenge, we see no reasons to increase duration across the portfolio, supporting our hold-to-maturity strategy.