Evercore Pan Asset

The G20 agenda was always going to be a bizarre mixture of items reflecting the very different perceptions and priorities of twenty different world governments, and of the other countries and international institutions in attendance.

The leaders were unsure whether to spend more of their time on discussing how to get out of the present international economic downturn, or on trying to prevent something similar happening again. They were more willing to discuss greater regulation and higher borrowing in the future, than how much stimulus to apply to the present.

The US and the UK were keenest to get others to spend and borrow more. No country was prepared to use the summit as a platform to offer tax cuts or spending increases above those already announced.

Instead agreement was reached on putting more money into the IMF so they can lend more in turn to countries that get into serious financial difficulty. This was presented as a policy to help the developing world, but may need to be called on to support higher income countries that can also borrow too much and reach crisis point in bond and currency markets. Those who borrow too much will be able to borrow more on terms to be settled in the future.

The French and Germans were keenest to clamp down on tax havens, hoping to drive business back from lower tax jurisdictions to higher tax countries like their own. They settled for a list of offenders with gradations of opprobrium to be heaped on places that dare to offer lower taxes with insufficient transparency. They were also keenest on more regulation in the future to try to stop run away banks. Whilst the structure of largely national regulation will be kept, there are suitable words about international co-ordination and tightening of efforts. It will only work if regulators suddenly become capable of reading the cycle and willing to demand more capital and cash when all is going well. They haven’t been able to see the need for this in the past.

The myth of the summit was that all the leaders needed to agree and to do the same thing. What we want is for the countries involved to do very different things, for their own crises are different. Germany, Japan and China need to borrow and spend more, to import more, and to save and export less.  The US, Spain, Ireland and the UK need to do the opposite. They need to export and save more, and to borrow and import less.

Their solemn declaration that they will not pursue protectionist policies is unlikely to be followed in practise. Many countries are now trying to devalue their currencies to gain a competitive edge. Many countries are offering subsidy to their financial and industrial sectors. Some are even looking at ways of buying home produced goods at the expense of imports and examining tariff and non tariff barriers to foreign goods and services.

What matters is the change being made to monetary policies throughout the world. These, and their currency impacts,   scarcely get a mention but they will largely determine what happens next. There are signs that the massive sums being committed to banks and markets are beginning to have an impact on some asset prices and on commodity prices. It looks as if the authorities favour another bout of credit expansion and inflation, but they will not want to mention that in the communiqué.

There have now been some useful gains in Asian equities. The rally in China started earlier this year, whilst other Asian markets have joined in vigorously in the general rally of the last couple of weeks. We remain more optimistic about Asian and emerging market equity than we do about shares in the UK and Europe, favouring these locations for substantial representation in any equity portfolio. The US is also now enjoying a rally, with some believing that the worst is over for the troubled banks. We also continue to support corporate bonds, which so far have not performed well this year but continue to offer attractive yields. It is difficult to see how markets can carry on raising the values of share capital, whilst continuing to regard much corporate debt as being at substantial risk of default.

We expect US and UK government fixed income bonds to continue to benefit from purchases by the authorities themselves and from quantitative easing. However, they do not represent good long term value, so we advise our clients with any remaining holdings to switch out of them whilst yields are low by historical standards. We expect there to be some resurgence of inflation in due course. The UK will have more price rises to come from the lower level of sterling and its high import dependence, despite the obvious downward pressures on prices from lower demand. There will also be an upturn in commodity prices once recovery gets underway – indeed there has already been some rally from the lows well before any increase in underlying demand for commodities like oil and copper.

We are currently considering adding some commodity investments to our longer term higher risk portfolios, to complement the positions in Asian equity.