Over the past two years the bull market in equities has been turbo-charged by central bank money printing on an unprecedented scale and the rollout of Covid vaccination programs in 2021. But with many governments reintroducing restrictions in the face of Omicron, Covid continues to cast a shadow of uncertainty.

Inflation is running significantly ahead of central bank target levels, with US CPI inflation at 6.8% in the year to November – the highest level since 1982. UK CPI inflation is currently at 5.1% and predicted by the Bank of England to peak at 6% in April. In response to this, most central banks look set to tighten policy next year with the winding down of stimulus programmes and interest rate rises.

Jason Hollands, managing director of Bestinvest, said: “Inflation and rising borrowing costs are the two key themes that investors need to be conscious of in 2022.

“Although headline inflation should start to fall back after peaking in the spring as energy prices ease, there is a risk that core inflation – which excludes energy and food prices – lingers for some time.

“This environment will be particularly challenging for bonds, with gilt yields already deeply negative in real terms once inflation is factored in. With returns on cash savings and bonds set to continue to be eroded by inflation, equities remain relatively attractive and therefore I do believe equities can make further headway in 2022, but likely at a more muted level than we’ve enjoyed in recent years.”

Hollands warned that investors will need to be much more risk aware than they’ve needed to be over the past couple of years given rising borrowing costs, especially as valuations in parts of the market are stretched.

Growth sectors, such as technology and biotech, which have been the standout winners of the past decade, typically struggle in such an environment whereas the attractions of companies churning out solid profits today and reliable dividends become more apparent.

He said: “The UK market continues to trade at a significant discount to global equities overall – an opportunity not lost on international private equity firms who have been highly active bidders this year.

“I expect to see this continue in 2022. While the UK market’s lack of major tech companies has been its Achilles Heel in recent years, what it does have in abundance is exposure to financials, industrials and commodities, the sorts of sectors that prove resilient in an inflationary environment and as interest rates rise. I therefore think investors who’ve ignored the UK in recent years, might want to take another look at the opportunities on their own doorstep.”