Article

Enjoy the recovery whilst you can

April 22, 2010

 
   
After the doldrums of February, share markets have been enjoying a good run. We have seen recent evidence that China has achieved a very strong turn round, with her economy now growing at almost 12% a year. The US reported better looking output and inventory figures, and is now well into the upswing. India continues to power ahead, with inflation at high levels. Japan is managing some growth as world trade picks up. Euroland and the UK are at the slow end of the pack, but the international improvement helps even the slowest performing economies.
 

The world remains divided. Asia will enjoy a strong recovery and will resume her superior trend rate of growth. There are worries about inflation and excessive credit, but the authorities in both China and India do not wish to choke it off too quickly or too severely, so we can still enjoy the good news. China managed to record a balance of payments deficit last month, after a long run of huge trade surpluses. It is a pointer to her success in encouraging home consumption and a reminder of the extent of her imports of commodities to stockpile. It is also good politics, at a time when the US has been pressing China to revalue her currency to curb the trade deficit. If the US has now learned not to make public criticisms of the Chinese exchange rate, we might move closer to China permitting a modest revaluation as part of her anti-inflation policy. This would help with the necessary adjustment between creditor Asia and debtor US. It would cut the value of China's big holdings of US debt, make US imports into China cheaper and Chinese exports to the US dearer. No-one thinks the Chinese balance of payments deficit is a permanent feature of the new landscape, or that China has suddenly lost competitiveness.
 

Meanwhile in the west the government debt problems do not go away. The Greeks have followed up the agreement in principle to offer her subsidised loans with a formal request for such borrowings. The theory that some put round that the presence of the soft loan facility would sort out the crisis without recourse to the loans was always a very optimistic one. The danger in all this is the loan discussions and negotiations take senior Greek attention away from the importance of curbing the deficit by cutting spending. The Greeks are still seeking what they think is an easy way out, which simply delays a solution for longer. It is surprising Germany has accepted this. It is bad news for the Euro in the longer term.
 

The UK remains locked in long and largely fruitless election debates. None of the parties wants to spell out detailed plans to cut spending sufficiently to curb the deficit. At least all say they wish to cut it, but markets will await the decision on who will govern and await their more detailed plans before coming to a final judgement on whether it will work or not. The betting odds still favour a small majority Conservative government. Whenever a hung Parliament seems more likely sterling weakens. In the meantime UK equity investors do get more dividend yield as compensation for the risk, and can buy into big company shares where most of the revenue and assets are overseas anyway.
 

We recommend staying invested, whilst watching like hawks for future government debt crises and action to tighten money to rein in inflation. The world is recovering, but there are huge imbalances between borrowers and savers, and between Asia and the rest, that do need to be adjusted some time somehow.    
 

Regards,
Evercore Pan-Asset Team

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