Evercore Pan Asset

There’s a smell of scorched bear about this week. The people who have helped drive the markets down by selling shares they do not own are having to buy back to cover themselves. On cue, the news and commentary starts to shift in emphasis. Last week it was all news about the recoveries slowing, with fears of double dip. This week people have remembered that the world economy is still likely to grow by more than 4% this year, and again next.

We had a long discussion this week at our monthly asset allocation meeting about how things might move from here. We reminded ourselves of the longer term Big Picture – the continuing rise of China, India, Brazil and other substantial emerging economies. We agreed that the West would see some growth this year and next, but the long term growth rates of the UK, US and Euroland have been damaged by the debt overhang and by the complications of the single currency in the EU.

The timing and scale of the initial world recovery owed much to the huge fiscal and monetary stimulus injected by China around the turn of 2009. The latest wobble in markets owes much to the Chinese cooling, through control over the increase of bank credit.  The commodities cycle of the last eighteen months was influenced heavily by the pattern of Chinese re stocking and then by the monetary tightening which limited further purchases. We anticipate China is moving closer to the point where the authorities have done enough to cool their economy and to take some of the heat out of price rises and wage rises. They have clearly cooled asset prices, with Chinese shares down 26% YTD* on the domestic market.

I said on Tuesday that I would pick out some things we do like, having stressed the disappointments from long term and short term ownership of Western shares that many have suffered in the last blog. Today we like Asian property, where the etf yields nearly 4% and the growth prospects are reasonable. We like Asia ex Japan and emerging market shares where we expect high growth to fuel decent returns. The emerging markets are not on a large premium to share values in the USA where growth will be slower, and do not face the same problems as Euroland where the debt crisis has been massaged but not solved.

This was always likely to be a year of low returns. It will also be yet another year when the East outperforms the west in terms of economic growth, and when the west has to continue to tackle the consequences of too much borrowing in the private sector prior to 2008, and too much borrowing in the public sector. The Euroland banks may soon pass their stress tests, and a round of public sector cuts has kept the market wolf from the door of the worst performing Euroland countries. However, the EU remains wedded to extensive regulation, relatively high taxes, and tougher controls over bank advances. None of these features imply easy conditions for enterprise or any long term acceleration of the sluggish growth rates we are now growing used to.

*(Shanghai Composite Index)