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Global equities rose at a double-digit pace in 2021, even as volatility increased towards the end of the year. After a weak start in January, shares notched seven straight monthly gains, driven by robust corporate profits, ultra-loose monetary policy, the rollout of Covid vaccines and optimism about further US fiscal stimulus. From September onwards however, performance was more mixed as central banks in developed markets looked to address rising inflation concerns. Volatility spiked in November amid concerns about a rapid rise in Covid cases driven by the new Omicron variant. Nonetheless, equities ended the year strongly, posting a gain in December and trading near record highs. Commodities (natural resources and agricultural products) also ended the year strongly, lifted by pandemic-related supply bottlenecks and the positive demand implications of economic reopening. Core government bond markets posted negative returns as accelerating inflation fostered anticipation of higher interest rates. Corporate debt held up better; the positive earnings backdrop and a low default rate helping.

The pandemic continued to dominate investor sentiment over the period. Developed markets countries rolled out vaccines in the first few months of the year with relative smoothness, helping to promote a revival in economic activity, which bolstered equities. Less positively, initial progress was slow in many emerging markets, but some Asian countries made good headway later in the year. But there was some relief as initial evidence suggested that Omicron, while highly contagious, was relatively mild in effect and caused fewer hospitalisations and deaths.

A shift in the outlook for monetary policy was a prominent theme of the year as inflation readings in numerous countries indicated that prices were rising swiftly. During the initial months, the key developed markets central banks argued that higher prices would likely prove to be temporary and maintained their ultra-loose policies, continuing monetary stimulus and holding their key interest rates near or below zero. The picture began to change around mid-year as inflation continued to accelerate, rising well above official targets in the US, the UK and the Eurozone. As the year came to a close, core developed market central banks made a dramatic shift toward tightening policy: just days apart in mid-December, the Federal Reserve in the US projected as many as three rate hikes before the end of 2023, while the UK’s Bank of England raised rates for the first time since 2018 and the European Central Bank laid out plans to end their pandemic stimulus programme.