Evercore Pan Asset

In 2008 cash has been a great asset. It has given an income of more than 5% in sterling for much of the year. If UK investors have ventured into other major currencies they have usually made money. Cash has been solid as most other assets have plunged in value. Looking back it was an easy call to make, to stay in cash or to raise cash through sales of other assets as the banking crisis developed.

2009 will be tougher to call, for two main reasons. Cash now yields under 2% in the UK. Interest rates have fallen or are falling sharply in all the major centres. Investors can no longer rely on a reasonable yield as well as the capital certainty of cash. At the same time, most other assets now look so much cheaper, as they have fallen so far.

At Evercore Pan-Asset we look carefully at yields on assets. If we could believe the yield of more than 6% on UK shares they would be attractive to us, but we don’t. We expect plenty of dividend cuts in the New Year, ranging from banks that cannot pay dividends until they have repaid government capital through manufacturers that need the dividend cash to pay the wages and redundancies, to retailers smarting from poor trading. The yield on “safe” government bonds has already tumbled, but there are still plenty of buyers looking for a relatively safe haven that still yields a bit more than a wholesale cash deposit.

We expect in 2009 investors to gradually take on a bit more risk in order to get a bit more income. Pension funds may decide to buy some more corporate bonds, for although there remain hazards ahead for companies with too much borrowing, the safer corporate bonds have very attractive yields which pension funds and charities might wish to lock in. In the early weeks of 2009 investors are still likely to be pushing money into longer term government bonds, especially in countries where the balance of payments figures and the government deficits are under reasonable control. Governments themselves and banks are likely to be buying some longer dated bonds to push the prices, though we need to be aware of just how much some governments are going to have to borrow as they pursue their reflation strategies.

Currencies will remain volatile, as investors sell those backed by governments which are borrowing too much and by economies that are especially weak. Governments themselves are likely to be important players in currency markets, with several major countries now worried about their currency becoming too strong for the comfort of their exporters.

We are recommending picking up a bit of extra income by taking a bit more risk as we enter 2009. Investors also need to remember that you will need less income to take care of inflation, as it is likely inflation will continue to fall rapidly in the New Year. For smaller investors in the UK there are still some better deals to be had by placing deposits in a range of banks and building societies keen to compete for funds, and National savings still offer better rates than the money markets afford.