Of course, few of us have ever benefited directly from the zero or even negative interest rate environment but, relative to history, the cost of secured and unsecured borrowing has never been lower. 2022 will raise the curtain on the so-called “zero bound.”

What has precipitated this change is the recent path of inflation, which is accelerating across most of the developed world, printing at 6.8% last month in the US and at 4.6% in the UK. In the inflation-phobic Germany, the most recent reading was 5.2%, well above the widely accepted 2% target.

Interestingly, central bankers around the world have been hoping to see higher inflation for most of the last decade. The zero-interest policy was designed, in part, to raise inflation so a “transitory” rise is to be welcomed rather than feared. But, as in many areas in life, it is the dose not the poison that counts, and whilst Goldilock’s porridge has been too cold for a decade, central banks cannot afford for it to get too hot in the forthcoming decade.

In that sense, the zero-interest rate policy and QE have done their job, but the inflation outlook is murky for other reasons as well.

Firstly, and rather obviously, the pandemic has damaged supply-chains and employment due to absence, isolation and sickness. At the same time due to OPEC output restrictions and the incipient recovery in demand, the price of oil has risen sharply. In the US, “Gas” rose in price by over 58% in 2021. But this damage should be temporary: OPEC will raise production, and one way or another the pandemic will end and people will get back to work. Supply chains will recover but they may not recover fully.

Secondly, the process of de-globalisation appears to be accelerating. The US and China are moving from mutually cooperative inter-dependence to mutual competition and perhaps, outright hostility.

In the UK, wherever one stands on the totemic importance of “sovereignty,” the full implementation of post-Brexit trading rules has and will raise costs and reduce trade (and by extension raise the tax burden on the residual economy).

The likelihood is that some of the powerful disinflationary forces that have been at work for the last twenty-five years or so will go into reverse this year. The long drift down in interest rates has ended if we believe that global growth will remain positive for the coming few years. We remain concerned that the central banks will not be able to raise rates enough before economic growth slows and forces them to stop. This dichotomy has driven market pricing for the past thirteen years and although we hope it will resolve itself it is important to keep an eye on the risks both ways from here.

On the other hand, the remarkable statistic coming out of the pandemic is the strength of household and consumer finances. Indeed, many consumers are coming out of the pandemic in a stronger position than they went into it (notwithstanding the real hardship experienced by many people) largely because of furlough supported incomes, the sheer inability to spend due to lockdown periods, and a sharp rise in property values, not just in the UK, but in much of the developed world.

Consequently, as we head out of the pandemic years, there is a great deal of “pent-up” demand; people enjoy spending, shopping, and socialising but crucially, consumers have the funding to pay for it. Given that consumption is two thirds of the economy, we think the strength of consumer finances can carry the recovery forward notwithstanding a modest rise in both borrowing costs and a likely rise in general taxation.

As these changes pass through, asset prices are likely to be more volatile as markets re-price the new environment. Higher interest rates will prove difficult for long duration assets particularly those with no associated cashflows (i.e. loss making companies).  We are already seeing some aggressive rotation in stockmarkets out of the “blue-sky” tech related issues into more conventional, “old economy” companies with visible revenues, profits, and importantly growing dividends.

Overall, we think that equities can weather the undoubted difficulties presented by 2022 since final demand and fixed investment both remain healthy with both household and corporate finances in surprisingly strong shape.

As ever, though, ensuring that your portfolio is suited to your time horizons, risk appetite and capacity to bear losses in the shorter term to generate longer term real returns.