Most Western Central Bankers, and virtually all private sector economists have now declared the recession over. Probably around three months late, but better than their forecasting record going into said recession.
Consensus growth for China in 2010 is now 9% plus. Most stocks in our universe are at or above pre-Lehman’s levels. A lot of respected (?) commentators are talking ‘V’shaped recoveries on the back of a rebound in inventories. Property markets appear to be stabilising in the West and moving sharply up to near record levels in parts of the East. Strategists are writing lengthy tomes about how it is now safe to ‘add beta’ to your portfolio and sell all the boring defensive stuff. Always best to leave the first 500% or so for someone else. We have heard of short memories in financial markets, but this is ridiculous. Remember the Global Financial Crisis of 2008? Well, here’s the bad news. It’s still here. Budget deficits are huge and will have to be scaled back by tax rises and spending cuts – even in China.The fiscal stimulus will revert in sign next year at the same time as savings rates continue to rise modestly from ludicrously low levels. Interest rate structures will rise. You may get 0% on a savings account but you can get 4% or so for one year money. The free kick for the banks in the first half when spreads were huge, the Government was a well-flagged buyer of last resort and competition for deals non existent is already largely history. Corporate bond spreads have come in a very long way and banks will find it harder to hold their customers to ransom. A lot of demand has been pulled forward – cash for clunkers, China’s subsidies for rural purchases of electrical goods – and will make the comparatives as we move into next year even harder.
The recent feeding frenzy over all ‘risk’ assets is nothing more than a fear of being left out and sacked as an asset manager. There is still some selective value in markets, but it isn’t in the stuff that’s just gone exponential. Buy the quality growth companies at below average valustions and the boring utilities. Sell the commodity stocks selling near ’07 peak prices and the Hong Kong and Chinese property developers at a premium to NAV. You will get a chance to buy them more cheaply over the next quarter or so.
