Evercore Pan Asset

On August 27st we asked are shares cheap. We thought the markets had overdone the gloom and the forecasts of double dip, at least in the short term.

So it proved. Markets rallied strongly, as investors sifted through the economic statistics and concluded there was no immediate danger of the US, UK and German recoveries abruptly terminating.  Most economists are sticking with their forecasts of world growth in excess of 4% this year, with more growth to come in 2011.

The figures have been a mixed bag. Industry has recovered in a lively way. There has been a combination of re-stocking and a surge in world trade in manufactured products. Final demand is in many cases still below the pre crash levels, but well up on the disastrous lows hit in the depth of the Credit Crunch. Western banking has continued its recovery from crisis, with many banks now reporting much better profits and cash flow, taking advantage of the low rates they can borrow at in money markets to rebuild margins by lending on at higher fees and charges. The service sector in general has been slower to  respond to improving conditions, but fell less in the downturn.

The developing economies have again outperformed the west. China and India both have overheating problems. China is seeking to curb inflation through controls on bank lending and property. India is tightening money by raising interest rates, but so far is behind where she needs to be to get on top of price rises. Meanwhile the need for western consumers to repay debt and for western governments to start to rein in their appetite for more borrowing will understandably slow the recovery in those countries.

We continue to recommend balance and moderation. The world economy is recovering, but not in a racy or convincing way. The large imbalances between west and east, between saver economies and borrowing economies, between emerging markets and advanced markets are persistent. The Euro crisis has been put on hold but the underlying problems have not been solved. The western banks are going to be forced into more restrictions on lending and controls on their conduct which will reinforce the slow pace of growth.