Evercore Pan Asset

The easy money rally continues apace. As we hoped, Asian equity has rallied strongly on the back of improved sentiment, spin and more dollars on Wall Street. There is a concerted effort to talk up the world economies in the run up to the G20, more Central Banks are adopting the policy of quantitative easing, and more investors are tiring of poor returns on cash. Risk appetites are increasing.
 
We remain concerned about the state of the UK economy. The timely warning from the Governor of the Bank of England will scale down any fiscal stimulus the government may have been planning, and has reminded people in the government bond market of the wall of debt that faces them as the UK works its way through two years of borrowing in excess of 10% of National Income. The latest figures show the authorities on target to borrow more than £150 billion in 2008-9, with a planned large deficit again in 2009-10.
 
Investors and markets need more information about how this or a future government will get the nation’s finances back onto a more realistic footing. How much could be done by cutting spending? How much by asset sales? In a world of intense competition for jobs and capital how could taxes be increased without damaging the attractiveness of the UK as a service centre and manufacturing base? The options are narrowing, and any government will find itself facing tough choices. Any sensible analyst has to conclude that growth rates in the UK are likely to be much slower in the period 2008-2014 than they were in the period 2002-7 despite the big fall in the pound which will help competitiveness to some extent.
 
Slower growth will come from less inward migration of people, from slower growth in banks and other financial institutions, from the continuing property uncertainties and from the drag of a much larger deficit-encumbered public sector. We regard the current rally in UK equities as a good opportunity to switch from them into more attractive asset classes.
 
Once the world can see an upturn, on the back of the easy money and the more positive government approach, commodity prices may move up a little more. There has been a bounce from the very low levels of earlier this year, but the prices of many commodities are still below the levels needed to sustain growth in output. A growing world, once Asia Pacific resumes more normal growth rates, will require more commodities which in turn is likely to fuel some further price rises. Oil below $50 is good value in the longer term. Industrial metals and agricultural commodity prices are also much more realistic today than six months ago, when they were still puffed by large speculative positions.