Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

THE last 12 months have been good to investors, building on the V-shaped recovery from the pandemic bear market in early 2020. A successful vaccination programme, at least in the developed world, has offered hope that Covid-19 will eventually be consigned to the history books.

Although new variants such as Omicron complicate the picture, markets are pricing in a return to some kind of normality in due course. Re-opening economies have fuelled a recovery in corporate earnings and that has been reflected in a strong stock market performance.

As we look forward to 2022, there are good grounds to believe that the bull market can continue despite a longish list of things for investors to worry about. Top of that list, alongside the emergence of new variants, is the return of inflation, with prices rising on both sides of the Atlantic at rates not seen in many years.

Rising prices are putting pressure on central banks to tighten monetary policy by, first, reining in bond buying programmes and, second, raising interest rates. Central banks will be in focus throughout the next year.

Despite these concerns, company earnings continue to rise, albeit at a slowing pace. That’s kept valuations in check - they are high but not excessive by any means. Sentiment is not too optimistic, suggesting we remain some way from the top of this market cycle.

My picks this year reflect the mixed backdrop. We anticipate an ongoing preference for shares over bonds as the promise of higher interest rates puts upward pressure on bond yields which move in the opposite direction to bond prices. We also expect inflation to be a persistent concern through the year. Finally, we expect some of the markets which have played second fiddle to the US during the pandemic to play catch up. In particular, we like the look of the UK and Japan.

Watch this video of Tom’s Fund picks for 2022

The first fund pick for 2022 is a global equity fund. With luck, the Fidelity Global Special Situations Fund will capture any continuing uplift in stock markets, while manager Jeremy Podger adds additional value through his stock picking and regional asset allocation. Global Special Sits focuses on three drivers of return: exceptional value; competitive advantage; and catalysts for change such as mergers and acquisitions. If, as we hope, we remain in the middle stage of an ongoing bull market, this fund will be a good core holding.

The second pick this year is an attempt to buy some insurance against the return of inflation. If price rises remain modest then shares can continue to perform well. But, at higher levels, commodities, and particularly precious metals like gold and silver, tend to do better.

The Ninety One Global Gold Fund, managed by George Cheveley, invests in gold miners rather than in the metal itself, which is good news in a rising gold price environment because their profits usually rise faster than the price of metal itself. Gold tends to do well when interest rates are kept below the rate of inflation, which is the case today and expected to remain so for the foreseeable future as central banks try to stimulate further recovery.

We are playing the third theme, valuations, with our third and fourth fund picks. Both the UK and Japanese stock markets have risen during the pandemic but at a more subdued pace than the more popular, growth-focused US market. That means that shares are still available in those two markets at more attractive multiples of earnings.

The Artemis UK Select Fund, managed by Ed Legget, is a fairly concentrated portfolio of 40-50 stocks with a bias towards the cyclical, value-focused shares that do best in an economic recovery. Legget believes that the cyclical recovery in Britain still has a way to run, fuelled by a UK consumer with more money in the bank on average than before the pandemic. He thinks that companies that survived the lockdowns of the past two years are well placed to emerge stronger thanks to the disappearance of many of their competitors.

The Japanese stock market is one that rarely features on UK investors’ radars, but it is one of the biggest markets in the world and has actually kept pace with Wall Street over the past 10 years. Despite this, Japanese shares are cheaper than their US counterparts, monetary and fiscal policy in Japan is supportive and Japanese companies are increasingly shareholder friendly when it comes to dividends and share buybacks. Our preferred fund for investing in this market is the Baillie Gifford Japanese Fund, managed by Matthew Brett, which has a focus on one of the country’s areas of competitive advantage, advanced technologies like robotics.

How did 2021’s picks fare?

Last year’s fund picks were published at a turning point in the pandemic. The success of Covid-19 vaccine trials had offered a first glimpse of light at the end of the tunnel and the cyclical market sectors that had suffered so much in lockdown started to revive.

Our picks played three themes: sustainability, income and an expected UK recovery. In a strong year for investors, the five funds we recommended all delivered positive returns over the past 12 months.

(%) As at 30 Nov

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Brown Advisory US Sustainable Growth Fund - - - - 35.0
FP Foresight UK Infrastructure Income Fund - - 14.9 -0.2 5.6
Fidelity Special Situations Fund 16.2 -4.5 9.8 -13.1 23.6
Fidelity UK Select Fund 17.4 -3.8 16.8 -7.4 20.1
Stewart Investors Asia Pacific Leaders Sustainability Fund 10.6 9.2 3.8 17.3 17.4

Past performance is not a reliable indicator of future returns

Source: Morningstar, from 30.11.16 to 30.11.21. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). The Fidelity Global Special Situations Fund, Ninety One Global Gold and Baillie Gifford Japanese Fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. The Fidelity Global Special Situations Fund also invests in emerging markets which can be more volatile than other more developed markets. The Artemis UK Select Fund invests in a relatively small number of companies so may carry more risk than funds that are more diversified. The Fidelity Global Special Situations Fund and Artemis UK Select Fund use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The Ninety One Global Gold Fund invests in a relatively small number of companies, so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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