Evercore Pan Asset

At Evercore Pan we have been saying all year there are better places to invest than the UK. Our concern has centred around the large banking sector relative to National Income and tax revenue, the large consumer deficit, and the growing government deficit. We have felt the government has been running too much financial risk, whilst the economy itself will enter a period of no growth followed by relatively slow growth.

All this seems to be endorsed by the government’s own heavily revised forecasts, published yesterday. They foresee growth for 2008 at 0.75%, with falls in quarters 3 and 4, followed by a fall of 1% next year, and growth of 1.75% in 2010.

Private sector forecasters are likely to see this as optimistic, with more fearing a continuation of the downturn beyond the second quarter of 2009. The UK’s growth in the last decade owed a lot to the success of banking, property, financial and business services, areas which are entering difficult times.

The government’s own finances are deteriorating sharply. The Chancellor told us he planned to borrow £78 billion this year compared with the last Budget forecast of £43 billion. The back of the new Forecast book shows that when the bank share buying and other financial transactions are taken into account, his cash requirement from markets and National Savings amounts to £157.7 billion. This will be followed by borrowing well over £100 billion the following year. This will be a big burden on the UK gilt market, even allowing for the demand from pension funds. Much of it will be borrowed for relatively short periods, leaving a refinancing hump early in the next decade. The trajectory for getting things under control again is long and leisurely, with the current budget not reaching balance until 2015-16.

How has he got into such a position? There are three main reasons, The biggest increase in borrowing comes to buy bank shares and nationalise smaller banks. I have been using the figure of £58 billion for 2008-9 for this programme. For the first time the government sets out more detail. Their current estimate for this year is now £69 billion. Apparently there is a £5.7 billion working capital facility for Bradford and Bingley, and £8.1 billion for the Icelandic banks to add to the amounts in my figures, whilst the government figures do not appear to include the extra share capital for Northern Rock as this was a transfer from lending to them.

The second biggest change is the collapse of tax revenues. This year they anticipate a revenue fall of £30 billion, to be followed by a huge dip of ££64 billion next year excluding the policy change on VAT.

The third change is a series of policy alterations in favour of more spending and lower taxes. The £8.6 billion next year off VAT is the largest.

Markets are currently rallying in relief that Citibank was rescued by the US authorities over the week-end. They also anticipate more reflationary measures from the Obama team when they arrive in office in January. The trend of world interest rates remains downward, and many governments are looking at ways to reflate by tax cutting and increased spending. In due course the combination of lower rates, more liquidity and government support will start to work. The news background will remain poor, as companies report bad figures, some go into bankruptcy or financial reconstruction, and as governments revise their forecasts downwards for economic activity. However, markets usually start to rise well before the bad news of recession is over. We prefer investment in Asian markets where funds are committing to equities. The US has to come out of recession to allow more favourable developments elsewhere. On the showing of this week’s figures we still advise people to avoid the UK.