Evercore Pan Asset

We have most of the conditions for a bull market. Interest rates are tumbling. Inflation is falling. The commodity and property bubbles have well and truly burst. Banks have raised an additional $1 trillion of capital, and western governments have made clear they are not going to let another major bank go down. Stock markets usually start rising well before the bottom of the recession, and well before corporate earnings start to improve.

So what are they waiting for? Investors and banks are still gripped by fear. Even though liquidity levels are now higher than normal, and banking cash and capital stronger than it was, investors and bankers are fighting the last war and trying to raise the cash they should have held six months ago.

There is still plenty to worry about. There remains a big overhang of shares in hedge funds that may need to sell to repay nervous investors. Hedge fund bank facilities may also be reduced. There remains large derivative positions. The banks may have raised $1 trillion, but they have also had to write off $1 trillion of bad or dubious debts. No-one can be sure how much more the banks need to write down. Investors still fret over how long and how deep the recession may be. Corporate news is still deteriorating at a pace.

We think it is time to put some money into equity markets amongst the stronger economies on bad days, if an investor is otherwise 100% in cash. We still would advise avoiding the UK. The weak financial position of both the private and public sectors, allied to the large scale of the banking sector relative to tax revenues and the National Income, means the risk is much greater. The pound has fallen a long way, but could fall further, as the government increases the strains on markets by its large borrowing programme. Underlying inflation in the UK will not fall as far as elsewhere, as the weakness of the currency in an open economy with a lot of imports will mean a weaker pound affects domestic prices.

The Eastern economies with strong balance of payments and government financial positions, led by China, will also suffer in the downturn but not in the same way as the over borrowed western economies. Their markets have fallen further than western ones, and now look more interesting.

Private equity, commodities and property remain very weak. They depended for their big price rises on plentiful capital and credit. The slow progress in restoring any confidence to banks and getting bank lending going is preventing any recovery in them. At the moment the Fed and the Bank of England are expanding their balance sheets, making plenty of liquidity available to the banks at last. Much of this is being lent back to the impecunious governments, by banks nervous about taking any greater risk with their lending. It is not a healthy or helpful process for either party. We will watch the banks carefully to look for signs of bank lending resuming at sensible levels. This will be necessary for any kind of recovery.