Evercore Pan Asset

This week there has been a small revaluation of the yuan, the Chinese currency, against the dollar. This was taken well by all the main share markets. The Chinese market went up as foreign investors looked forward to currency gains on their shares. Other world markets went up as investors thought a stronger Chinese currency would relieve a little of the intense Chinese competitive pressure on industry elsewhere in the world.

We have long recommended bigger investment positions in emerging Asia than the average Western investor traditionally holds. We have argued that China is very competitive, is going to carry on growing far more quickly than the west, and has a currency which should over the longer term go up to reflect this economic success. Over the last year the US put pressure on China to revalue. This probably delayed the decision, as China does not wish to appear to be responding to US demands. Her decision to allow some movement just ahead of the G20 tones down another dose of China bashing by the US President and others. It also will help China reduce inflationary pressures in her own economy.

So far this year as we near the half way stage UK investors have made money out of Asian and US shares thanks mainly to the currency movements. They have not earned a return from UK shares and have lost money in European ones, given recent declines in the Euro. As we feared, this so far has proved to be a low return year, with considerable volatility to worry investors.

Markets are currently behaving a bit better. Measurements of volatility are down a bit, we are enjoying more up days than down days, and investors are sure in their own minds that the US, the UK and Euroland are going to keep interest rates lower for longer given the stresses and strains in the system.  A realistic Chinese revaluation greater than say 10% will help a bit to rebalance the world economy. The US recovery is continuing and Asia is still enjoying strong growth despite the efforts of the Indian and Chinese authorities to cool things.

However, we should not underestimate the huge imbalances that remain. The sovereign debt problems have not gone away, and we are now into a round of competitive public spending cuts in Europe. We still recommend caution, and would not recommend Euroland bonds and shares for sterling investors. For choice we recommend reducing risk on good days in portfolios with high equity exposure.