COVID returned with yet another ‘wave’ and inflation bullied its way back into the national consciousness (along with a realisation that central banks had some ‘catching-up’ to do). Then there was Ukraine, the state of US politics, North Korea, Sino-US relations to name a few geo-political concerns.

The UK economic recovery, along with employment prospects, has remained strong, each successive wave of COVID having had a diminishing economic effect. The Bank of England made a hash of its communications in the run up to their November Monetary Policy meeting, suggesting that an increase in rates was imminent and then not delivering one. They did move in December but trust (and confidence) in the Bank has suffered. We should expect more increases in Base Rates in 2022, probably starting in February. Similarly, in America, the Federal Reserve has been too slow to react to the extent of inflation moving through their economy and will be raising their rates through 2022.

We expect economic growth to continue into 2022 on both sides of the Atlantic and this should lead to further earnings growth for companies. Ultimately, this is what will drive markets in 2022 (as ever) but we expect a bumpy ride. Energy prices, much in the news, are a real concern, hand-in-hand with inflation, and stock markets appear likely to be facing an uphill struggle with rising interest rates. Over the course of the first half of 2022, inflation should begin to moderate but it is most unfortunate that this has now become so newsworthy and a political issue.

Earnings estimates have continued to move ahead with the recovery, now showing a healthy 39% increase over the year, a recovery that does justify the move in the equity market. Dividend estimates are also recovering (up around 20% from last year) but are still some way behind December 2019 levels, it will be a while before we see those levels again.

The income yield on the portfolio is gradually improving with the recovery in dividend payments but, as above, this will not be a speedy process. Here is the disposition of the Balanced Equity Income portfolio at the end of the year, major UK companies are dominant, now representing around 62% of the portfolio, see chart, right.

We have continued to build-up the new holding in Kingfisher (B&Q, Screwfix, Castorama), and they continue to buy-in their own shares, which should be encouraging for their dividends this year. We await comment on their trading over the important pre-Christmas period. We have also added to the holding in Phoenix Group, provider of long-term savings and retirement products and ‘pension consolidator’.

The top holdings in the portfolio are little changed: Croda moves up after strong performance, while Sage Group and Greggs now appear in the list after equally good performance, while Reckitt Benckiser drop out. Harmony Energy is a new holding in infrastructure, they are building electricity storage facilities (essentially giant batteries), principally for renewable power, the generation from which varies with wind, sun, etc. The maturity of the National Grid index-linked issue reduces our fixed interest exposure, to date, we have not replaced this, looking for better opportunities. Finally, we sold out of the holding in Hipgnosis Songs, not sure that we truly understood their accounting.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.