Evercore Pan Asset

Looking back over 2008 it all now seems obvious. Equities were hit hard everywhere as the extent of the Credit Crunch and the recession became apparent. There was a rush into government bonds for safety. Sterling was very weak.

As a result you could make good money if you moved out of sterling into the stronger currencies, and could make even better money in some overseas government bonds. The performance of the Exchange Traded Funds we watch carefully showed up the wide range of outcomes.

Within equities you could contain some of your losses as a sterling investor by being in overseas rather than UK shares. The All Share ETFs fell by around one third, whereas the MSCI World Index funds fell by less than a fifth. Although the US market had a bad fall in local currency, the fall for the UK investor was less than a fifth. The worst performing ETFs were in areas like private equity and clean energy, where they more than halved.

So what do we expect for 2009? It is not so easy as 2008, as shares have now fallen a long way to start discounting the grim economic outlook, whilst the attractive returns on cash which we recommended last year have gone, thanks to a general policy of low interest rates in the leading monetary jurisdictions of the world. Government bonds are now also on lower yields, though it is possible they will fall even further in the short term given the general nervousness about other asset classes.

We think it is time to take a bit more risk than just staying with cash or short term government bonds. So we recommend some investment in a portfolio of corporate bonds, bearing in mind there will be more corporate casualties in the months ahead, but taking into the account the deep discount already available in the market for the extra risks. We also would put some money into Asian equity following the large falls, as they will benefit when the US economy does start to turn and to lead the world out of the crisis.

We do not think it is time yet to buy sterling, as we fear that the continued deterioration of the government accounts, and the downward revisions to general economic forecasts for the domestic economy still give people little reason to buy the currency, when added to the authorities decision to keep cutting rates. It is true you can also find negatives concerning both the dollar and the Euro, and true that the Chinese and Japanese currencies have been revalued considerably in 2008, but we do not yet expect there to be an early revaluation or favourable reappraisal of the pound.

So our advice is to stay reasonably cautious, because the Credit Crunch is not yet over and there is plenty more bad corporate news to come. On bad days pick up some equity in the stronger economies as prices are now much lower, and gain some income through a portfolio of the less risky better yielding company bonds.