By David Clark

When I last wrote for The Herald, I said I was sceptical that the inflationary pressures we had seen – and continue to see – in the UK were going to be as “transitory” as the world’s central bankers would have us believe. This view has now become rather more mainstream, which concerns me a little bit, but not enough to change my mind.

Supporting evidence continues to pile up, including the fact that the oil price is now through $80 and I note the latest Chinese economic data was on the disappointing side.

For me, the most worrying aspect was the increase in Chinese producer prices, which rose last month at their fastest rate in more than

25 years as manufacturers passed on soaring energy costs. This matters because China has an important role in global markets as a large-scale manufacturer of goods for sale and consumption around the world, including the UK.

These rising costs are passed on vbto the UK consumer in the form of higher prices which, in turn, fuels inflation leading to the central bankers to consider what to do about interest rates.

The debate in the UK is not a question of “if” interest rates will rise but, rather, “when” and “by how much”. Across Europe this process has already started, with Hungary, Norway and the Czech Republic having made the move, as well as many more emerging market economies.

In addition, the macro-economic environment has become a little more difficult for equity markets as policy makers are discussing the tapering of quantitative easing measures. My suspicion is there will be a rate rise towards the tail end of the year.

I had thought that post-Brexit, businesses would pause their plans for capital investment as they adjusted to the new trading realities. Well,

I got that one wrong. In fact, the return of investment capex growth has been very strong at around 17 per cent to the end of last month.

This reminds us that it would not do to become overly pessimistic. GDP growth in the UK will undoubtedly slow in 2022 but will remain strong overall and may be up to three times normal trend growth. The pandemic continues to be a substantial challenge to full recovery of the global economy but in the UK, as well as the US and

the Eurozone, the vaccine programmes should ensure recovery will continue over the balance of this year and into next.

It is arguable that I should have seen the spike in capex coming as investment growth post a recession is invariably the dominating force in the immediate recovery aftermath. History has shown us investment growth picks up about two quarters after the low point of a recession which, in the case of the current recovery, means investment growth is strongest in 2021. The general tendency for investment growth is to decline in years two and three after a recession. As the spike in investment diminishes, typically the running is taken up by consumption growth, starting out slowly then growing faster in years two and three as consumers become more confident about the stability of the economy and their ability to spend discretionary income.

The ECB and the UK’s Office for Budget Responsibility have some pretty startling forecasts for consumption growth in 2022 (+7.0% and +11.1%, respectively). Given the increase in energy costs that we have and will continue to experience, as well as the fact the Universal Credit changes will remove more than £6billion from the UK economy and the inflationary pressures on goods and services mentioned previously are significant, these numbers seem on the optimistic side. That said, there can be little doubt GDP growth will be material.

It seems likely supply chains in the UK will

be sorted in due course and that the shelves

will start to be restocked, but it will take investment at both local and national levels, which will only contribute to the inflationary pressures.

As a portfolio manager, I am conscious that rising interest rates effectively deplete the value of the future cash flows of a company. This may give one a pause for thought when considering those (mainly technology) companies that are reliant on future cash flows for their valuation.

It is in the US market this phenomenon has been most pronounced (think Tesla), though it is by no means the only market.

It is perhaps apt I turn to the savviest of all US investors for words of wisdom as market conditions approach a crucial inflection point. Mr Warren Buffet once said: “Only when the tide goes out do you discover who’s been swimming naked.”

It’s not going to be pretty.

David Clark is investment director at Saracen Fund Managers.