Evercore Pan Asset

Adjusting to low growth is proving to be a painful experience. There are generations of investors who have been brought up to believe western equity investment is the right answer for pension and charitable funds, and for rich individuals. Buy shares more or less any time, and hold them for long enough, and you will make money. The investment world is still equity oriented. It wants to believe that growing dividends, reflecting growing economies, will take care of inflation and a bit more. Over all but the short term shares should give you real returns.
 
Since the 1990s there has been a cloud on the share horizon called Japan. Japan enjoyed great returns from shares as the Japanese post war miracle took off and then matured. In 1990 crisis hit, at the very point where investors were confident and talking about Japan overtaking the USA. A property and banking collapse led directly to a stock market collapse. In the twenty years that have followed Japan has experienced slow growth. The Stock market is still struggling to get back to one quarter of its value at the old peak. There have been trading opportunities to make money, but the old adage of buy and hold and it will come right has not applied for more than two decades.
 
Japan tried most things to offset its banking and property crash. Many of them are remedies becoming familiar to the west. The Japanese slashed interest rates and have kept them very low. They ran a series of large budget deficits, and moved from being a low borrowing country to become a country with huge public debts. They administered various monetary stimuli. They undertook measures to try to sort out their banks. They put in place large public investment programmes. None of it has led them back to faster growth, and none have propelled the Stock market to anything like its old levels. It is true Japan remains a wealthy country, with relatively high incomes per head, some great exporting companies, and the ability so far to finance its excess public spending by domestic borrowing at low rates. This has not, however, rekindled the cult of the equity.
 
The question for investors today is could the USA and Europe become more like Japan? There are some similarities. On both sides of the Atlantic there have been bad banking crises. It looks as if Euroland and maybe the USA have to settle for lower growth for the foreseeable future. Euroland faces the same problem as Japan with a declining and ageing population. As people get older so there patterns of investing and consuming change. The USA and the EU are discovering as Japan did that low interest rates and deliberate monetary creation do not automatically propel a heavily indebted country with weak banks back to fast growth.
 
There are some important differences. The USA – and the UK – has a younger, population than Japan. The population is growing through inward migration and the birth rate.  European and US assets were not as overpriced as Japanese ones at the peak of their boom. The US economy so far has shown a greater capacity to innovate and to allow enterprise to flourish, creating new waves of large businesses doing things no-one did ten years earlier.
 
There are lessons to be learned from the Japanese experience, especially for Europe. The conclusion I draw is you cannot always rely on equities to earn you the returns you need. Investing in advanced economies with banking weakness and demographic problems may tip the balance too much against the pension or endowment investor. Some old truths need revising in the light of the Japanese experience. We live under a very long shadow of the Credit Crunch in the west.  
 
As published in Investment Week