Evercore Pan Asset

We said 2011 was going to be a difficult year. We thought we had seen the best of share markets in 2009 and 2010. Bonds were likely to be hit by rising inflation and rising interest rates. Making money in 2011 was going to be hard work. So it proved in the first quarter.

The first two months were bad for emerging market shares. Japan was a better early performer, only to be cruelly cut down by the earthquake and tsunami. In March share markets generally picked up, and Japan bounced strongly after the crisis collapse. Some confidence returned to several emerging markets, the US powered on aided by easy money and quantitative easing. Gold fell a little, oil rose, and commodities generally made further upwards progress.
 
We did not buy the Japan story at the end of last year. This quarter owing to tragedy Japan ETFs fell by around 8%. We now think it makes more sense to buy, as there will be added stimulus to rebuild the torn north of the country and to replace lost electricity capacity. In the short term the economy will suffer, but later it will grow a bit faster as it revives.

We sold out of Indian equity last year. This quarter the problems we foresaw started to catch up with India, and ETFs tracking this market fell by about 7%.  Taiwan also fell a similar amount, where we have no specialist exposure. China had another quiet quarter as the authorities put their full weight into curbing lending and inflation. Shares continue to look cheap, but we may still be a little away from the turn around, which should happen when the monetary tightening has done enough to control price rises.
 
On the plus side, cash and bonds were reliable if dull.  US equity ETFs gave a gain of 2%, UK property performed well with an ETF of REITs up by over 6%. Timber came into its own and the ETF rose 8%, and a general commodity ETF was up 5%. It was a quarter to hold on to the gains you made in the two previous years, and to manage the real risks post Credit Crunch in the West, the political risks in the Middle East, and the risks from curbing inflation in the emerging world.
 
We expect a bit more of the same in the second quarter. US monetary ease will give us a bit more growth and enthusiasm before the US has to turn to deficit reduction, to the end of cheap money and the end of quantitative easing. This is likely to darken the world markets generally as this occurs around the middle of the year. The EU is about to raise rates and to force deflation on the struggling members of Euroland. The UK is entering a tough phase of its private sector squeeze, as high inflation combines with higher taxes to reduce disposable incomes and consumption. The next positive thing that can occur for world markets will be a return to easier money in China, Brazil and the other leading emerging economies which have been tough to curb inflation in recent months.
 
Rising inflation and rising interest rates in the West is not a great background for bond investment. We advise people to stay short or to stay in near cash with the defensive part of portfolios. The EU is conducting new stress tests on banks and may discover more problems and have a further debate about bond holders taking some of the losses. Meanwhile many governments are struggling to curb their deficits and to present a more realistic schedule of bond sales for future years.