Evercore Pan Asset

We’ve been cautious for months. In the last few days markets have had another bad attack of the jitters. If something can go wrong, they argue, it will.
 
There’s still plenty to worry about. On one side of the world, in Asia, they are trying to slow their runaway economies before inflation gets out of control. On this side of the world advanced countries are reining in their deficits before they sink under a pile of debts. Worse still, the western governments want to blame the banks for the collective errors of the Credit Crunch. In doing so they make it more difficult to finance a strong recovery, as they threaten taxes and regulations to limit bank expansion.
 
In this climate bonds do well and risky assets fall on rumours. Disappointing US job figures frightened markets into another sell off. Falls in Confidence indicators from higher levels spook investors. Some hedge fund managers who have had a torrid time so far this year with jumpy and volatile markets, the very conditions they say they like, have decided to short the markets now they are down. Stories circulate about double dip recessions.
 
We expect something a bit different. All year we have warned this would at best be a low return year. We expected overall reasonable world growth, but patchy and slow growth in the West. Despite all the interest rate rises in India and the credit squeeze in China, we like most forecasters anticipate strong growth in emerging Asia – and in Brazil.
 
The problem for western equity enthusiasts apart from their dire performance for ten years now is they still do not offer good dividend income. The yield on the US and main European ETFs is below 1.5%. The UK Index gives an apparently higher yield, but this has been subject to the dividend collapse in 2008-9 by the big banking sector, and more recently by dividend cuts by mining companies and BP. A good and rising income is an important characteristic for successful equity investment.
 
We will keep low investment positions in western equity because the headwinds against recovery remain strong. We still think it wrong to hold 50% in a mixture of UK, US and European equity as many long term funds do. These are going to be areas of slower growth for the next few years. They remain markets where governments intend to tax and regulate more, which is damaging to enterprise and dividends. Some are now overdoing the gloom. We would not want to be short of these markets after this sharp selloff, but then we never sell short because of the risks involved. I will follow up on Friday with comment on some areas of investment we like better.