Welcome to The Longview, your monthly digest of global economics, asset allocation and global market trends. I'm Chris Watling.

In the longer term, we remain resolutely positive on equities throughout this year and into 2010. The arguments are well-rehearsed and we've laid them out in previous programmes over recent months. And in particular the key to the argument, the sense that there's an economic recovery coming, has been gathering steam and building momentum over the course of this last month. In particular, in the States, if you look at things like the bounce in consumer confidence, the stabilisation in some of the housing indicators, the improvement in the manufacturing and production indicators, and of course the Chinese data and so on and so forth. The evidence is building. The medium-term case is strong. In the short term, however, we have concerns. In particular, our sense is that markets appear to have got ahead of themselves. The rally from the lows in early March is about 35 per cent in size in the States, similar size rallies in other parts of global equity markets around the world. That's large, and in the context of post-World War II rallies out of bear markets, beginning bull markets, that's one of the largest, surpassed only by what we saw in the mid-'70s. In '75 out of that bear market, a 50 per cent rally. So the rally's large, but most importantly, of concern to us is our indicators, which are suggesting on a one- to two-month view markets are heavily overbought. You can see that on all sorts of indicators, but most particularly we'd refer to the risk-appetite indicators, which show that risk-appetite has been excessive and is high and those indicators are now generating very strong sell signals. Over and above that, sentiment has normalised from an extreme bearishness level, and insider selling has again started to signal a bearish signal once again. Insiders are selling. Company directors are selling. They're not confident in the share price they see now. And most importantly of all, we've had a signal from our sell-off indicator. This indicator is designed to warn of waves of risk aversion. It rarely gives signals. And when it warns, you'd expect a sell-off quite soon. Last signal we saw on May the 20th, 2008, beginning of a very big down leg in markets. Previous to that October '07, February '07, June '06. And an efficacious indicator, an indicator that warns of a potential sell-off 5, 10, 15 per cent in equity markets, an indicator that's not to be ignored. On top of that, the behaviour in various parts of the world's equity markets confirm that sell-off indicator signal. Certain equity markets around the world are behaving in a euphoric nature. They're going up in almost vertical ascent, indicative of short squeezes, indicative of the scramble to get in, that you typically see before this type of wave of risk aversion. Whether it's Hong Kong up 10 per cent in two or three trading sessions, Taiwan something similar, Singapore up 18 per cent in five trading sessions. The market is telling you, the price action is telling you, there is very much risk of a wave of risk-aversion in the very near term. So given that backdrop of positive long-term, cautious short-term, we're therefore taking a neutral stance in equities for the course of this month, maybe into next month, looking to move overweight on any weakness.

Last month we discussed the case for recovery in the States beginning in the second half of this year. And indeed, the data I've highlighted earlier is increasingly confirming the likelihood of that coming about. This month we want to focus on the UK, an economy that we've been bearish on for over 12 months. But also an economy we think that will start its recovery at the beginning of 2010. In particular, and underpinning that, the economic adjustment in the UK is well-advanced. Indeed, we can see that adjustment is well-advanced in a whole host of manners. Most obviously house prices, which have adjusted significantly down, about 25 per cent in real terms, from their highs. Now whilst we think house prices have further to go, the speed of descent should slow from here, given money's cheap, credit conditions are easing. Secondly, the savings rate in the UK, the household savings rate, has adjusted rapidly. In previous recessions, we saw the savings rate rise by 9 percentage points, 7 percentage points and 5 percentage points going all the way back to the early '70s. Already in this recession, we've adjusted by 7 percentage points. We've gone from -1 per cent beginning of last year to +5 by the end of last year. That adjustment's well-advanced, and helped by a whole host of factors, not least the fact that mortgage debt servicing is falling dramatically as interest rates have fallen. Our estimates suggest households will save £25bn on mortgage interest in 2009 alone, relative to '08. That's 2.5 per cent on its own on the savings rate. Over and above that, of course, the oil price is helping. Petrol is saving people about £7.5bn, £10bn this year probably. And of course consumers are giving up borrowing. That's reversed. That's unwound. They're now paying back debt. With all these factors, the savings rate's adjusting, has adjusted. By the end of this year, should have reached way above long-term average levels of 6.5, 7 per cent. Over and above those factors, of course, the exchange rate's going to do a lot of work for the UK. That adjustment is already in place. The exchange rate's fallen the most it's fallen since the early '70s. With a recovery in the States and China, our exports should start picking up. And on top of this, of course, the key to this whole credit crunch, the banks, are showing signs that they have been to a degree repaired. Credit conditions are easing, lending's starting to flow, the governments of course have ensured a whole host of their toxic assets, not least injected a load of equity into these banks. And the financial system is starting to crank up slowly but surely. All of these factors suggest to us the recovery in the UK is coming, and it's going to start early next year. That was The Longview. You can download this programme from our website, longvieweconomics.com, from Cantos' website or from the iTunes store. Do get in touch through the website if you have any questions. We hope you enjoyed watching, and we look forward to seeing you next month. Goodbye.