John Redwood (pictured), Chairman of Evercore Pan Asset’s Investment Committee, on the effect of the Euro crisis on world markets…
These are savage markets. As we feared, the markets continue to worry about the Euro crisis. More are concluding that cash or near cash is the best short term answer. Fewer investors want to hold risky assets.
In recent days the market sell-off has become indiscriminate. It is not just the western bank shares, at the eye of the storm, or Euroland shares generally that people are selling. They are now liquidating positions in sounder investments like Asian shares. In the last couple of days they have even moved on to selling gold and silver, the very precious metals that were thought to represent some haven of value at a time of huge doubts about sovereign debts and paper currencies.
There is some logic to market actions. Commodity prices generally, and the price of oil, should fall as the crisis slows western growth rates, hitting demand for raw materials. Shares of some companies in the west face falling activity and in some cases profit declines, as slowing growth hits their revenues. Western banks have to deal with possible write downs on Greek debts, and fears that other sovereign bonds might lose them money as markets run out of patience with other highly borrowed Euroland countries.
Asian equities have been subject to their own bearish influences, thanks to monetary tightening, increasing interest rates and efforts to slow their growth to curb inflation. On top of this there are now worries about drops in export markets as the west slows. It leaves Asian shares in countries like China on low ratings. The Asian tigers do have scope to reflate by cutting interest rates and allowing more credit growth, unlike the west where interest rates are on the floor and bank credit limited by weak balance sheets. We are watching for signs that China is about to decisively move from a counter inflation policy to an expansionary policy, as China has scope to expand domestic demand to make up for the losses in exports. The world economy needs such a move, as do share markets.
At the heart of the fears lies the Euro debt problem. Over the week-end news filtered out of the IMF of a Euro 3 trillion support package to recapitalise Euro banks and to bail out Euro sovereigns in trouble. Yesterday this was scaled back to Euro 2 trillion. The problem is this package is still imprecise. Markets will want to see the detail, will want to know how credible it is and when it will all be approved, ratified and up and running.
The July package to save the Euro is still not implemented, two months later. It now looks like too little too late, as some of us said at the time. If the new plan is to add to the agreed FSFM more lending by the European central Bank, that does not add a great deal to what is already known and partially happening. Investors want to know that German and French taxpayers are going one way or another to stand behind the large debts built up in other Euroland countries. They want reassurance that in future however poor the economic performance, the Euro countries will keep their new borrowing under good control.
We are still some way away from successful resolution of this crisis. It is now damaging assets not directly affected as well as those centre stage for the crisis. We continue to recommend caution, with substantial cash positions ready to take advantage of substantial weakness in risky assets in due course when a way forward can be seen.