February 2023

Will inflation revive after the summer?

View from the Square

Will inflation revive after the summer?

We have been looking forward to the point at which the rate of increase in the rate of inflation starts to fall. While the current round of strikes seeking higher wages has possibly delayed this tipping point in the UK, it is now clearly evident in the US. The level of interest rates, both current and projected, is a major factor in determining the attractiveness of equities, and so the pain of higher short-term rates that we face now can lead to higher valuations, if longer term interest rates start to fall. We seem near to that prospect at the moment and so stocks and shares have had a good start to 2023.

Our problem is that, in the UK at least, there is the real risk of inflation picking up again in a few months' time. As the exceptional inflation pulses flowing from last February start to recede, the immediate scope for optimism, the re-opening of China, is likely to act as a major catalyst for renewed pressures. In the UK we have long been aware of wage pressure being a key contributor to inflation and it is going to take a lot of resolve from a weak Conservative government to hold the line until Consumer Price Inflation (CPI) starts to fall convincingly.

Hopefully, we will enjoy steadier equity and bond markets for the next few months as comparator figures start to improve. There is a temptation to select the fastest growing companies almost regardless of price. Last year showed how any resumption of inflationary pressures, and interest rates in turn, could severely damage highly rated stocks. For that reason, while we will run fairly fully invested portfolios for the first half of 2023, (keeping our eye on Emerging Markets, Precious Metals and individual undervalued stocks in particular) our fears of embedded inflation will require flexibility with a potential significant strategy change as the year progresses.

2nd February 2023

W.Forsyth, Executive Chairman and CIO



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