Article

Where are we? - John Redwood Comment

June 04, 2010

Where are we?

We forecast 2010 as a year when it would be difficult to earn decent real returns. We said markets might be volatile, but end up offering poor returns. After five months it is sad to report that is the pattern so far.

Up to June 4th world equities have produced no overall capital gain, and not much income. Within that owners of European equities have typically lost more than 10%, thanks mainly to the currency, whilst holders of US shares may have made some gains on the rise of the dollar. Emerging Asian equities have produced small gains overall, whilst Japan has produced a 7% gain. Holders of corporate bonds in the UK have seen little capital gain but have earned the good running income.

Amongst the ETFs we follow Clean energy has been the worst performer, down 26%. We are glad to have avoided that one. Our star performer so far this year has been US property, up 16%.

So what should we expect from here? The economic recovery remains in place, with most forecasting strong growth in Asia ex Japan, reasonable growth in the USA and slow overall growth in a damaged Euroland and in the UK. This would normally allow rising share prices. However, there are strong headwinds to better growth, and understandable worries about the world economy.

Many governments favour higher taxes that can damage enterprise and effort. Australia has embarked upon a high tax on mining company profits which is leading to the cancellation of many projects crucial to future growth. Several countries favour higher taxes and more regulation of banks as punishment for their role in the Credit Crunch.  If this is done too heavily it will impede banks from financing a more vigorous recovery.

Interest rates are on the rise. Australia, Canada and India have all increased them. China has been reining in credit sharply. The US and UK official rates will go up when next they change. The bond markets have forced up longer term sovereign debt rates where countries have been borrowing too much in Euroland, and may do the same elsewhere. The major Central banks of the world still seem keen to devalue their own currencies, creating a race to the bottom.

We think it remains time to be cautious. The best we can hope for is to find sustainable and in some cases rising streams of income and buy them on favourable yields. It is not time for 100% cash, but balance and moderation are our current watchwords. Concentrated risk and active trading could lose you a lot of money in these volatile and difficult conditions. Advanced world shares remain disappointing over the longer term as well as the short term, still showing poor results over the last decade.

Regards,
Evercore Pan-Asset Team

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