Evercore Pan Asset

Markets have continued to make strong advances. There is a general feeling that we have seen the worst of the decline. Investors who had built up large amounts of cash feel the need to commit some of it to markets to avoid losing out. More money is coming in. In the UK money is having to go into pension funds to tackle their deficits.

The news background however remains poor. Dividend cuts, reduced profits and poor output figures proliferate. Some worry that this recession is by no means over. They fear that the poor state of the banks and the huge debt overhang in the USA and the UK mean difficulties in returning to good growth.

The oil price has been especially strong. The oil futures market makes it profitable to buy and store oil, trading against that position. There are large quantities of oil stored in tanks and tankers around the world, as the price surges. It reminds us how much speculative demand there is for oil, and how the absence or presence of investment money makes such a difference to the price. There have been similar rises in some other commodities, well ahead of a revival in underlying demand.

So we are left with the same dilemma, as investors. Is this just a very strong and persistent rally in an otherwise gloomy and deep slump? Or is this the beginnings of a new bull market, based on the new liquidity coming in to the system and on the fact that share and commodity prices had got far too low?

In Asia the Indian elections produced a result the markets had not been expecting. The victory by the existing government, with more seats than anticipated, allowed the markets to move up dramatically. In China there is some evidence that the reflationary measures are beginning to work. The quantitative easing money in both the USA and the UK seems to be finding its way into equities. Investors are naturally nervous about the longer-term prospects for government bonds in both countries, given the large issues ahead.

We have invested most of our discretionary client money in Asian and world equity, and added positions in commodities more recently. We are not chasing prices in these better conditions, but continue to recommend that clients take some risk when something is stirring in financial markets and when in due course lower interest rates and  more money will have an impact on economies. We took some modest profits on European corporate bonds, as we became more nervous about the prospects for the Euro.