Interest rates look set to rise and the volatile markets will offer a stern economic test to whichever party wins the upcoming general election, a leading Midlands businessman has warned.

Adrian Quin, head of the Birmingham office of investment manager Williams de Broe, said despite some chinks of optimism, there was still plenty of reasons to be cautious in 2010.

“The outlook for all financial markets this year is trickier to call than for a considerable time,” he said.

“At the start of 2008 it was not difficult to look into a crystal ball and see that we were in for a rocky ride. And one did not have to be too much of a contrarian to see that the world was likely to end 2009 in a better state than it had entered it. As we now look forward to the rest of this year and towards the start of 2011 it is more difficult to see which way the scales will tilt.

“On the domestic front we have a general election in the UK in the first half of the year with a change of Government seeming almost inevitable and this will in turn change the terms of reference for monetary policy which is currently under very heavy political influence.

“Markets always like to test new governments and with inflation highly likely to be above target at that time we should expect that there will be considerable pressure for interest rate increases.

“We can envisage a scenario towards the later half of the year where inflation is at or above its two per cent ceiling, base rates and gilt yields are on the up, taxes are rising for both individuals and corporates, and earnings expectations for 2011 are being cut,” he added.

Speaking ahead if its Professional Intermediary Investment Roadshow at Opus Restaurant, Mr Quin added: “It can be an easy mistake to look at the UK and Western economies in isolation because, while we have been slumbering, emerging markets have been making hay.

“This year is one where the potential outcomes are more difficult to predict and poles apart.

“It is a year when more than ever active, dynamic asset allocation is an absolute prerogative for successful investment management.”