The Honeymoon is Over www.pan-asset.co.uk

Feb. 24, 2009 - PRLog -- The US market has not responded well to the twin packages proposed by the new President. The honeymoon has been short-lived.

The main problem with the President’s approach is the large extra borrowings he will need to raise to pay for it all. The bank and Insurance company rescue package is getting larger by the day. The decline in the economy is boosting the government deficit anyway as tax revenue falls and unemployment related spending rises. On top of this Mr Obama is adding “reflationary” measures.

The combination has led to some rise in government  bond yields as market participants work out just how much more government debt will be issued. It has rekindled longer term inflationary fears by some, and led to strong opposition from the Republicans who have condemned the big debt build up.  Today the President is going to tell both the Senate and the Congress that he will return to the paths of financial rectitude before the end of his first term. He will need to back that up with substantial detail to make it persuasive. At the moment all the forces of events and policy are pointing in the opposite direction of more borrowing. The US is likely to put more capital into banks and AIG, as the new Administration is “stress testing” them all in a way that is likely to conclude some need more capital.

The UK is pointed in the same direction. The losses of the nationalised banks have weighed in at £30 billion for last year. Taxpayers will be asked to forgo interest on the Preference shares put into Lloyds, just as surely as the government has converted the high yielding Prefs into something easier on the bank for RBS. The government is still unearthing more losses and difficulties in the troubled banks.

The positions of the US and the UK are different. The US has the world’s reserve currency, with many creditor nations owning substantial quantities of US government debt. Whilst the US obligations to sort out their banks are large, they are not as large relative to the size of the economy as the UK banks are to the UK economy. It gives the US a bit more room for manoeuvre than the UK.


We remain concerned about the UK. Government debt is about to treble on official figures, as some allowance is made for the liabilities of the banks now wholly or partially owned by the state.  If you add in the pension obligations and other balance sheet items the figures are even larger. We still recommend avoiding UK equity investment. We see plenty of reason for caution. We continue to hold high quality corporate bonds, as a way of trying to improve the poor running returns on cash.

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We belive that carefully considered asset allocation decisons is the cruicial part in the investment management process and argue that identifying the correct asset classes in which to invest is more important than selecting the underlying stocks.