Evercore Pan Asset

There has been a brave attempt to talk the markets up. Green shoots have been sighted in the residential and commercial property markets, in retail sales, and even in the rate of decline of manufacturing. After the promise of the big increase in money which should come from quantitative easing and from the large expansion of the UK public deficit should come some response in asset prices and in due course in activity.

I fear the UK residential property market still needs to fall further. One month’s figures on one measure showed an increase. The other measures showed continuing decline. The three month and annual figures still point downwards. It is taking a long time, as it usually does, for house prices to adjust to the new reality.

Mortgages will be scarcer. Valuers will be more cautious in their view of the worth of a property to be mortgaged. Banks will want bigger deposits. More people will be out of jobs or fearing the loss of their job, so there will be fewer seeking to buy. Today we learn there is an increase in the number of dearer properties coming onto the market as executives lose their well paid jobs. Although interest rates are very low, helping affordability, house prices were very high. People will be more cautious for the time being about committing to house prices many times their incomes. They will begin to fear the next move, when it eventually comes, will be to higher interest rates.

You cannot get out of a crisis brought on by borrowing too much by seeking to trigger another round of over borrowing. If you try to inflate another bubble, which you may, it will just delay the necessary adjustment and may make it even more painful when that comes.  UK consumers were lent too much money to buy both houses and cars. The sudden removal of much of that credit caused the crash in both markets. The government may be trying artificial stimulus, but with broken banks it will be difficult to get enough new money through in the form of mortgages and even car loans to sustain another boom in these. If it takes on to the government books too much of the responsibility for pumping things up again, the government’s own credit rating will suffer.

The US may get away with reflating again. With the world’s reserve currency and with the strength and depth of the US economy it may succeed in printing enough and borrowing enough to turn the corner. When it does the Asian economies should benefit as well. That is why we continue to prefer selective equity investment in Asia/Pacific. We still recommend avoiding UK equity investment and regard UK gilts as expensive and high risk.