Evercore Pan Asset

World Stock markets are continuing upwards, despite the bad economic news. The harder it rains, the more the markets say it will be sunny soon. We are living through a period when the gap between what people are experiencing in the rest of the economy, and what the markets are thinking about valuations and the future is especially wide.

So what is the good news that has led to the improvement in share prices? Markets no longer think the main banks will go under. They reckon enough has been done to stabilise them. If it hasn’t, they realise governments will come to their aid again.  They think banks in this climate can now write profitable business for the future. They see the massive destocking underway as a sign that we are nearer a turn. Once companies have run out of stocks or think their stocks are low enough, they have to start making and buying again.

There is plenty of cash around. Governments are seeing to that with their quantitative easing policies and their easy money policies. Many investors, often late in the day, built up their cash positions as the market crashed. Some now think they need to commit that money to shares before they rise out of reach. Many are disappointed with the returns on cash and looking for a better home for their savings and reserves.

The headlines are very different to the mood. US GDP fell by 6.1% annualised in the first quarter. UK industrial output has  hit a new low. House prices in the US and the UK  keep on falling. Unemployment is rising. So which is right?

The answer is, both can be. Markets always start to rise well before there is any visible sign of improvement in the real economy. Unemployment goes on rising well into the upturn. If you print enough money and keep interest rates low enough, there will be an increase in asset prices. We would just remind readers that an economy like the UK one will experience a slower trend rate of growth for years, as it combats the high borrowing levels and the large deficits. A possible economic recovery still leaves the deficit countries with large debts to pay off and large deficits to finance.

We continue to favour investment in faster growing economies, and think commodities are attractive at these levels.