Evercore Pan Asset

Figure 1: 2009 Stock Market Performance

Source: Thomson Reuters
The figures for last year show that all markets performed well after a weak first quarter, leading to some stunning gains over the year as a whole. As we expected, the Asian markets were the stars. They had fallen a bit further in 2008 than the advanced markets, for no good reason. Once people saw the prospects of recovery they rushed to buy shares in Asia ex Japan, Emerging markets, BRICS and other permutations on the developing world theme.

We do not think that trend is over yet, despite the very good performance last year. This year there will be more talk of recovery in all parts of the world. Investors will watch to see how much longer the main countries keep up their very loose monetary policies. We have warned before that this year will see increases in interest rates. China and India are already talking of corrective action, as they have lively growth and some inflation. The UK will have an inflationary problem during the first quarter, though it will be reluctant to take urgent action on interest rates given the political timetable and the fear of feeble recovery. It would be surprising if rates were as low by the end of the year as they are at the beginning of it in any major territory.

We are not recommending a sudden move into cash, even though there are now risks on the downside and there could be disappointment ahead at the progress of some economies. We think there is still more gain to be anticipated, as most investors will not want to leave large sums of cash earning so little, and will think they should take a bit more risk as the recovery gets into its stride in the emerging countries, and edges forward in the developed countries. We expect the two tier world to continue, with faster growth in the emerging world and slower growth in the West, especially in the heavily indebted countries where both the private and public sectors will have to rein in their appetite for other people’s money.

We recommend a balanced portfolio, expecting less exciting gains than in 2009. We expect market participants to buy shares and other assets that have seemed to be left behind in the first force of the rally, and to reduce the more extreme risks taken as risk appetite picked up last year. There is some serious fund raising to be done in both the equity and bond markets. There are banks to refinance, properties to fund and there is likely to be more merger activity after the lull of 2008-9.