Peter Brown: Inflation will persist and stock market investors should take note 

We have maintained for quite some time now that the US would be the first major developed region into the interest rate hiking cycle, and we believe they will be first out of the cycle. 

So, it is likely we will see a cut in the US first, which will signal the possibility of lower rates here in Europe too. 

The outlook for inflation is not as clear as market sentiment would suggest, however. 

Indeed, we see an argument that inflation could rise from current headline levels as oil prices tick higher. 

Container costs have also risen, wage inflation is a worry, and we have commodity shortages, at a time when war spending is inflationary and the Chinese economy, despite a massive property crash, is expected to grow by 5% this year. 

In the early 1970s, inflation soared to 12% and then eased back to 6%. 

However, for the rest of the decade and into the 1980s, it roared back, even as it was believed inflation was under control.  

The point is that inflation is notoriously difficult to predict. Central banks were completely caught off guard in 2022, and will still likely be reluctant to cut rates aggressively. 

The low to zero rates experienced before the rate increases in 2022, were not the norm. Indeed, eurozone rates in the early noughties were between 3% to 3.5%.  

I do not expect any rate decreases below 3.5%, and certainly see no return to very low rates unless we see a massive global recession, which we are not predicting.  

The markets are doing well due in a large part to the performance of the "Magnificent 7", the group of US stocks that includes Apple, Microsoft, Amazon, Nvidia, Google, Tesla, and Meta.

The Magnificent 7 account for almost 30% of the S&P 500 index and trade at a 46 times price to earnings, or P/E, ratio. 

If you buy the Magnificent 7 group of stocks, you are paying 46 years’ worth of current earnings. 

The crazy rise in their valuations is down to expectations around artificial intelligence, or AI.

We know AI will be disruptive and many companies are going to make extraordinary profits, including Nvidia. 

But looking elsewhere, it is notable Chinese technology stocks trade at a P/E of seven. That is a much better stock market gamble. 

Indeed, across the spectrum, I prefer alternative investments rather than the overvalued US stock market. 

Commodities, and stocks linked to commodities, are also a great investment, including uranium.

Gold, which we have favoured for several years, is finally breaking out. There are also opportunities in Japan and Latin America.

The market is expecting a swift fall in interest rates. If that does not come to pass, there will be a correction for both stocks and bonds. 

We prefer the inflation trade, value stocks, and commodities, while avoiding overpriced stocks and long duration bonds.

Our prediction is that we will see a token interest rate cut in early summer in the US, because when all is said and done, it is an election year in the US. 

However, any rate cut will depend on the economic data. 

If inflation ticks higher in the meantime, any rate cut may be pushed back. 

In Europe, the ECB would likely follow any interest cut in the US, but that decision will also depend on the data. 

For those hoping for a return to pre-inflation conditions, I do not offer much hope. 

There are too many inflationary pressures, and getting the headline inflation rate down to current levels will likely prove to have been the easy bit. The last leg of reducing the headline inflation rate to 2% could be a lot more difficult task. 

We should recall Mario Draghi, the head of the European Central Bank, in the aftermath of the financial crisis, had a target in his eight-year tenure to help get eurozone inflation higher.  

Despite slashing interest rates and printing enormous amounts of free money, the ECB failed in this endeavour: Controlling inflation isn’t that easy. 

• Peter Brown is managing director of Baggot Investment Partners