Evercore Pan Asset

It has been fashionable for many months to claim China and the emerging market countries have outgrown their strength. Some forecast a bursting of what they claim is a property and banking bubble in China. Some just think China will overdo applying the monetary brakes. Some think China is inflating too quickly, allowing others to become more competitive.
 
There is always the danger that China will overdo the monetary tightening. There remain political and banking risks in China, as elsewhere. If the gloom mongers are right it will not make western equity markets particularly comfortable places to be either. Globalisation has made more western companies dependent on Chinese demand and trade, and many multinationals now have important Asian investments alongside their American and European core. 
 
Meanwhile in the west there are growing worries about the pace and health of the recovery. The US is about to end its second round of quantitative easing. It is true they will probably keep investing the money from bonds they own where they are paid back. They may well keep official interest rates lower for longer. The problems reside with the long shadow of the Credit Crunch. Residential property has fallen a long way from the highs. There is still a large overhang of empty and overmortgaged property. Consumers are not flush with cash. The US is waiting for Federal government action, to match the tough decisions some States are now taking to try to curb their deficits. Everyone assumes the Federal debt ceiling will be lifted in time to borrow more to pay the bills, but it still requires a political deal over how the deficit will in due course be curbed. Tax cuts may not b e renewed. 
 
On the European side of the Atlantic Germany has been exporting herself to success. German growth has been lively, as the economy recovers from the severe manufacturing downturn of the Credit Crunch. Inflation has picked up a little, leading to interest rate rises at the European Central Bank. Germany needs Asian and other emerging markets to stay healthy for her exports. She is also shackled to the rest of the Euro area, and is fighting against German taxpayers having to mount an expensive bail out of the problem countries in the zone. Germany may not have her own home grown version of the US and UK budget problems, but wider Euroland does.
 
The weaker countries on the periphery of the Euro area are still looking for various kinds of help. Greece wants more financial assistance, as the lending markets remain effectively closed to her. Nor does Ireland or Portugal expect much joy from the international bond markets any time soon. German taxpayers and their representatives want the bondholders to take some of the pain. They would like them to extend more credit to countries like Greece, and expect them to subsidise it. The European Central Bank, a large owner of sovereign bonds in the problem countries, is not so keen on this idea. It would mean writing down its own portfolio of bonds, and maybe seeking more capital from the member states.
 
Markets should not expect early or rapid resolution of all these difficulties. The last Credit Crunch was severe. It was bound to limit the growth rate of the countries most overstretched by it. The banks in many cases are weak according to the Regulator’s new higher standards. This means less credit available for consumers to spend and companies to expand. The continuing Euro difficulties are a poor backdrop to European economic progress. The area will be lucky to get through without a worse crisis first. The countries helped so far do not yet appear to be able to recover within the terms of the currency and loan packages. 
 
The best hope the world has of brighter times is a decision by emerging economies like China and Brazil to ease their squeezes. Their public finances are in better shape, and some would say their private sector credit is less overextended than the west. If they can grow faster soon we could have something to look forward to. If they overdo the slowdown, there is no reason to think the west can rescue the world’s economy. The Credit Crunch will cast a long shadow.  

As published in Investment Week