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Governments in a number of countries had launched comprehensive countermeasures, with swift interest rate cuts, bond purchases, expansionary fiscal policies and direct support to vulnerable companies and consumers. This had helped calm nerves and build confidence, which in turn had lifted financial markets to new all-time highs.

It was not until 2021, however, that these countermeasures began to take full effect. Meanwhile, a lot of demand had been put on hold due to uncertainty and direct restrictions on the supply side, not least travel, restaurant visits and other services with physical customer contact. With the easing of restrictions, households had significant amounts of cash ready to be spent.

Alas, easing was not a one-way street. The fight against the pandemic was to have several setbacks, in the form of new virus variants and new restrictions. Towards the end of the year came the omicron variant, which proved to be much more contagious than previous mutations. Thus, the year ended with new restrictions and partial lockdowns in several countries.

However, these setbacks were not only negative for the financial markets. They may also have contributed to prolonging the expansionary economic policies, as they made the recovery somewhat more subdued in the short term and the risk of overheating was reduced. 

In any case, there were signs of rising inflation. Already at the beginning of the year, it was clear that record-low interest rates and rapidly increasing money supply could breathe life into inflation. In turn, this would have to be met with higher interest rates, an obvious menace to both the stock and bond markets. All releases from the US Federal Reserve were scrutinised, hunting for signs of imminent tightening.

The result was that the world economy went from a sharp decline in 2020 to an exceptional upswing, probably the highest global growth rate since 1973.

Furthermore, the combination of lockdowns in many countries and significant backlogs also led to bottlenecks in a number of supply chains in many industries. This, too, was clearly driving inflation. Headline inflation rose, while underlying inflation remained relatively calm for the time being.

Many central banks, including Norges Bank, nevertheless initiated a cautious process of tightening. In Norway, we got two interest rate increases, each of a quarter of a percentage point, before the year was through. In the US, the Federal Reserve had clearly communicated that they were ready to begin tapering, which they did in November. All in all, however, modest tightening measures were implemented in 2021.

Thus, the year ended with relatively favourable business conditions in both the economy and the financial markets. A modest increase in interest rates was negative for long-term global investment grade bonds, but otherwise had little impact on the markets in 2021.

Since the expansionary policies had now worked for a while and consumers had, after all, found more to spend money on, growth picked up significantly. The result was that the world economy went from a sharp decline in 2020 to an exceptional upswing, probably the highest global growth rate since 1973.

Many companies used the low interest rates and the appreciation of the crisis to deleverage. They therefore met the recovery in good shape and earnings picked up significantly in 2021. This not only became a significant driver behind the bull market; it contributed to earnings multiples being lower at the end of 2021 than one year before.

All in all, 2021 was a very good year in the markets where Pareto Asset Management has invested clients' capital.

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