2nd March 2011
The bank says that emerging market inflation which has been a worry for some time may be exacerbated by the oil price spike and the prospect of a higher risk premium on oil.
It is worried that higher prices could feed through to wages not just in emerging markets but in developed markets sooner than anticipated too.
It is concerned that growth could slow or even stall if interest rate policy tightens to curb inflation.
The note says: "We believe that a slowdown in global growth is likely in the second half of the year given higher-than-expected energy prices – (a tax on consumption). In addition, inflation trends could lead to higher interest rates, and consequently higher bond yields.
This could impact on investors' appetite for equities but we do not think that bond yields have reached those levels yet."
However the bank says that many supportive factors remain for equities and it believes returns will remain positive if "less stellar" than they have been since September 2010.
"The growth in the US, the largest component of global equity indices, remains strong and accelerating. Higher oil prices may dampen this growth but not significantly if they stabilise around current levels. Indeed earnings growth remains strong and expectations are solid," it says.
It notes that in China, despite high inflation, earnings results have proved resilient.
However it says inflation hedging strategies will remain key in portfolios. It also remains positive on commodities and will look for exposure to equities across regions and sectors likely to benefit from higher oil and commodity prices.