Evercore Pan Asset

There is always plenty to worry about. The airline industry had a bad time from the volcano and the regulatory bans on flying. UK politics have sprung a surprise, with many voters at least temporarily flirting with a hung Parliament, the market’s least favourite outcome. The government debt crisis is not over, and now some governments are thinking of adding aviation subsidies to their list of spending commitments. The US regulators have started proceedings against Goldman Sachs. Hunting down bankers for past excesses may come to be very popular on both sides of the Atlantic. The US and the world authorities see banks and bankers as great targets for higher taxes and more regulations. None of these events are helping the bulls.

However, profits are still rising, interest rates are still low, Asia is growing strongly and the USA is recovering. The main props of the bull case remain. All the time the authorities around the world are more afraid of double dip and lack of growth than they are concerned about too much credit and the rise of inflation, asset prices are likely to rise. As we have said throughout this year so far, we think we have seen the best of the gains for this cycle in the big advances recorded by most markets in 2009. This year was always likely to offer less dramatic returns, and to have down months as well as an overall up trend. Recent news items have given markets sufficient reason to pause or back track a little in their climb.

The large world imbalances remain. Asia is growing very quickly and does have to tighten credit more to cool inflationary pressures. The US and UK have to use the advantage of their devaluations to export more. Germany and Japan have to find ways of stimulating domestic demand, as there are limits to how much more they can achieve by export led growth in a more competitive and constrained world.

If the UK does end up with a hung Parliament as current polls imply it is likely to delay tackling the deficit. As political parties haggle over a programme for government, there is likely to be more spending and fewer taxes rather than the other way round. Many are also likely to expect another election long before the five years are up. It reinforces our wish to stay out of UK government bonds and to leave any equity investment in the larger companies with wide overseas exposure. However, there are still fourteen days to polling, which is a very long time in politics with the electorate this volatile.

In the USA the President has more authority again now he has passed a Health Bill. He is using it to pursue an agenda of more public spending and more regulation of the private sector. He is not tackling the public sector deficit, and is if anything making the US economy less flexible and responsive.

We continue to run balanced portfolios and to aim for modest real returns this year, after last year’s big gains.