Andrew Bell, who runs the £2.2bn Witan investment trust, has warned the present strong performance of the global economy could be derailed by higher inflation.
Mr Bell was commenting as Witan announced an increased dividend for the 43rd consecutive year for the 2017 calendar year. The trust yields 2.1 per cent.
Witan is a multi-manager trust, that is, Mr Bell places the capital of the trust into other funds, based on his view of the global economy and markets.
He said the biggest threat to the global economy in 2017 is the potential for inflation to rise at a faster pace globally than the market currently expects.
Mr Bell said: “The success of oil producers in restraining output has pushed oil prices up which, unless the move is reversed, will increase energy costs for oil users. Increased cost pressures may reduce corporate profits, given the widespread lack of pricing power as a result of globalisation and the disruptive effect of technological change.
"Central banks might react to higher than expected inflation with faster than expected rate rises. These developments will be monitored carefully.
"Although moderate rises in inflation, interest rates and bond yields can coincide with healthy economic growth and rising equity markets, watchfulness is called for given the degree of investor optimism reflected in equity valuations.
"The volatile market conditions that appeared in early February were a reminder of the need for optimism on growth to be tempered by realism on valuations amid bond-market nervousness concerning possible inflation risks.”
It has been a noticeable feature of the economic performance of the US and Eurozone in recent months that inflationary pressure has largely been absent. The most recent US data on employment, showed more people in work, but wage growth remained below expectations.
Were inflation to rise sharply, then central banks, whose main remit is to control inflation, may feel obliged to put interest rates up at a pace faster than is currently expected, which would unsettle equity markets.
This is because higher interest rates slows down the level of demand in an economy, potentially hitting company profits, while also pushing bond yields upwards, which makes bonds more attractive as income investments relative to equities.
The Witan investment trust returned 22 per cent in the 2017 calendar year, compared with 23 per cent for the average fund in the AIC Global sector in the same time period.