Evercore Pan Asset

I was brought up to believe that shares were the natural assets for longer term funds. After all you want to pay future pensions or meet future wage bills, so you need assets with rising income that can keep pace with or preferably outrun wage inflation. The value of companies and their dividend paying power used to do more than that. You could buy US, UK or European shares anytime, and over a period of 5-10 years you would make money and meet the outgoings. You might get it wrong for a year or two if you bought in near a high point, but each succeeding market peak went higher than previous ones to justify even a badly timed purchase.

Over the last two and a half years we have been updating the returns on Western shares. The ten year returns throughout that period have been poor, in many cases even negative, in all cases well below wage inflation. Japan has offered dreadful returns for 20 years now, following the market peak in 1990, unless you were nimble in buying and selling during one of the rallies in the otherwise dreary and long bear market. Is there a danger that Euroland, the US and UK are going the same way?

It would be wrong to say the UK and Euroland are the new Japan in some senses. The Japanese credit blow out was greater in 1990 than the European one in 2008. Japanese share values were much more overextended in 1990 than western ones in 2007. The UK still has a rising population and a propensity to inflation where Japan has a falling working age population and a tendency to deflation. The US also has a younger and growing population and a flexible and better based economy.  Euroland is closer to those Japanese characteristics. It is true that Japan built up a huge public sector debt in a failed attempt to reflate her economy in the 1990s and noughties, just as the US and UK are building up large debts today. Meanwhile Euroland is trying to curb its appetite for debt and seeking to build itself on a more Germanic model of prudence in hard times.

I think we can conclude that the problems in the West will be somewhat different from Japan, but they will share some things in common. Both Japan and the West have to learn to live with the new super competitive Chinese and Indian economies. Both are wrestling with slow growth and the aftermath of credit problems. The earnings multiple valuations of UK shares are not currently demanding, but the market is accident prone, with 9 of the top 100 FTSE companies no longer paying dividends and several others cutting dividends or with dividends under pressure. Euroland is subject to fears and worries about the stability of the currency and how the economic government of the area will develop.

We think there are doubts and worries enough about all the Western markets to conclude that you can no longer buy and hold these shares to match your liabilities. The growth is in Asia, and growth drives higher values and higher dividends. You need to be fleet of foot to make money out of Western markets. Avoiding them in years like 2008 has become part of the necessary approach to generate sensible returns.