2021 was the year when economies and markets began the period of ‘living with covid’. Like much to do with the pandemic, this has come about very quickly – even if it does not always feel like it.

2020 had seen a stark response from equities. E-commerce related shares charged ahead as years of future growth landed early and ‘old economy’ shares fell sharply until vaccines changed the landscape. Last year saw a more nuanced response based on actual company results.

On the face of it, equity markets enjoyed a strong year. The US, again defying the ‘expensive tag’ as we entered 2021, performed very well (S&P 500 +25%). The UK, catching up other major markets, +15%, Japan +11% and Europe +20%. EM apart, returns were very positive relative to the near-zero returns from cash.

Dig deeper and there are some warning signs. The stellar US market remains dominated by a handful of mega-companies. Apple briefly rose above a $3tn capitalisation at the turn of this year! Just 5 companies make up 71% of the gains over the year. Followers of the Index as a bellwether for the wider economy should be braced for much volatility and misleading signals!

2021 saw inflation finally let rip. The actual figure is secondary to markets, rather than how long it will persist. The jury is out. Fixed Interest markets have priced in modest interest rate rises from the world’s Central Banks this year but longer dated government issues are still priced as if this is a spike rather than a move to entrenched high inflation. It will be an interesting year ahead.

Commodities mainly moved higher in 2021. Oil is still a key part of the energy mix despite its long-term inevitable decline. The price settled over $80 per barrel, a level at which the oil majors can operate successfully, generating the returns to help meet the huge capital expenditure required to transform their businesses.

Gold ended the year with a strong run, as did the dollar – signs perhaps that investors were seeking safe havens again.

The global supply chain remained in a state of flux and undoubtedly contributed to inflation. A major shortage of semiconductors has played havoc with many industries, most notably car manufacturing. The price of second-hand cars (a component of the inflation calculation) rocketed. In a microcosm of the wider inflation debate, the current betting is that semiconductor supply normalises, production steps up, and second-hand car prices revert to norm. We will see.

The pandemic remains front and centre of short-term performance as ‘living with covid’ plays out. Equity markets, by nature are optimistic and continue to look to better, healthier times ahead. 2022 is likely to confirm the optimism, one way or another. Meanwhile, as investors, it becomes easier to see which companies have successfully adapted their models, and which have not.