Evercore Pan Asset

The interest rate cuts we have been anticipating are now coming through thick and fast. This week has seen 100 basis points off UK rates, and 75 basis points off Euro rates. The Fed and the Bank of England are both ballooning their balance sheets in a rash of monetary activism, but still the commercial banks are reluctant to step up their lending. Regulatory caution requiring better capital ratios, the difficulty in accessing wholesale market funds, and the perceived increase in the riskiness of consumer and company lending are all impeding an expansion of lending.

The collapse of the real economy is also proceeding apace, as we feared. The centre of attention in the USA is the auto industry, as the CEOs of the big three US auto assemblers battle it out on Capitol Hill for public support and subsidy. The politicians are rightly demanding a proper plan to get costs down and to improve the model range to increase future sales. Even the Autoworkers Union has pitched in with some proposals for cutting labour costs, working on the basis that they would rather have some pay cheque than no pay cheque. The CEOs who were criticised for their travel plans and lifestyles, have promised to forgo the executive jets and some of the remuneration as they grapple with an industry that has let its costs run away with it in the face of leaner and meaner foreign competition.

In the UK more financial sector job losses have been announced, whilst the once very successful New Star investment management business needed to ask for new share capital from its lending banks in a major financial restructuring. This means that a majority of the shares are now owned by banks which in turn the taxpayer has major shareholdings in. It is another example of how in this climate more and more of the risk is being taken on by the taxpayer and the state, directly or indirectly.

We at Evercore Pan-Asset have remained very cautious, still favouring substantial cash holdings. We have remained bearish of the pound, which has continued to fall against the yen, the Euro and the dollar. The market reaction to the last 100 basis point interest rate cut was typical of the current mood. Sterling fell and shares also fell a little. Normally you would expect such a large interest rate cut to ignite interest in shares, as people tired of cash yielding less and became more excited about the prospects of recovery. The poor state of the banking system still weighs on the markets. Some pension funds are reducing their equity exposures after substantial losses, and there is still some flight from hedge funds and other actively managed equity vehicles.

We are watching the banks and the government’s many stimulatory actions very carefully. We have no doubt of the strong wish of the US and UK authorities to lift the recession. They are now using all the weapons in their armoury, of lower rates, more liquidity and fiscal stimulus. Both economies are going to experience high levels of public borrowing, as more and more risk is absorbed by the public sector. In the case of the UK the imbalances are worrying large, and the regulatory pressures on the banks are sending mixed signals. We continue to advise avoiding UK equity and property investments.