Evercore Pan Asset

At the end of last year the world fell in love with risk again. As we battled through the snow and ice, agonised about the age of austerity, and watched as they sought to patch and mend the troubled Euro, Stock markets revelled in the easy money and the signs of good growth in many parts of the world. It might be freezing outside and there may well be plenty more to worry about, but sometimes you need to enjoy what is going right.
 
2010 was a pretty good year for savers and investors. If you stayed at home owning shares on either side of the Atlantic returns were comfortably ahead of inflation. If you ventured further afield, into Asia and other emerging markets, the returns were generous. If you stayed in corporate bonds in the UK you could earn more than 6% on your money. If you bought gold, silver and other commodities you were laughing all the way to the bank. It was a year of recovery, a year of easy money, a year when investors regained some of their lost confidence. 
 
So what should we make of 2011? There is still some good news around to justify the more optimistic outlook of many business managers. World trade and output is likely to expand at a reasonable rate overall. Many millions more will leave the land and enter the cities in China and other emerging countries. The digital technology and communications revolution will continue to generate new users, new products and new business models accessible to the many. If we are fortunate China will not overdo the measures to curb inflation, and the West will wean itself off over indebtedness at a sensible pace which the markets will accept. All this points to another year like 2010, where you should be able to make decent money in riskier assets. 
 
None of this promise comes without genuine risks. 2011 could be the year of higher interest rates. The tightening is already occurring in India, China and Australia. At some point the USA and the UK have to move their short term official interest rates off the floor. As world inflation increases, so monetary authorities are likely to throttle back on the easy money policies they have been following since 2008. This is not such good news for asset prices.

The Euro crisis may well have another painful phase or two to upset markets. Bond yield may need to rise further as interest rates generally rise, cutting the value of bonds. A little inflation is often said to be a good thing, but you can have too much of a good thing. There are serious inflationary worries in several parts of the world. World commodity prices have risen rapidly in recent months. 
 
So what should an investor do? Should he or she pocket their profits from the last two years, say “Thank you”, and wait for interest rates to rise and for some of the uncertainties to be worked through? Or should he or she buy those emerging market shares they meant to own last year but did not  get around to? It all depends on how much risk you want to run, when you might need the money, and whether you mind prices going down as well as up.
 
We recommend balanced portfolios again this year, as last year. However, we are changing the mix. We will have less in bonds, as we do worry about rising interest rates. We will continue to avoid continental Europe, as we do not like the look of the Euro’s problems. We will continue with emerging market shares, but be watching very carefully the main individual markets in case authorities overdo the monetary tightening. 
 
It is important to remember the longer term trends amidst all the debate about short term pressures. China has come from number six in the largest economies rankings to number two in the space of a few years. Even the pessimists about China think she will continue to outgrow the West by a decent margin. Brazil has established a reputation for better economic management and decent growth. India still has her fans and has gone for growth in recent years, at the expense of quite rapid inflation. The shift of economic power and trade to the East after a long period of western dominance, should be reflected in the balance of a sensible portfolio.

As published in Investment Week