The storm is (mostly) behind us, says HAMISH MCRAE

It is time for a pause. The long Easter weekend gives us a moment to reflect on the troubling first quarter of this year, and to ponder about how the markets and the economy will develop in the months ahead.

In times of financial stress you usually get a seismic event that signals the turning point. In the case of the 2008/9 crisis there were some early shocks, including the collapses of Northern Rock and Bear Stearns. But it was the failure of Lehman Brothers – I believe the failure to rescue Lehman Brothers – that brought the global banking industry to its knees.

The scars remain. The Government still owns 42 per cent of Royal Bank of Scotland, now rebranded as NatWest, and the share price is roughly half the level it paid when it rescued it.

The question now is whether the rescue of Credit Suisse, itself triggered by the failure of Silicon Valley Bank in America, is that turning point of this cycle. I would like to think it is, but somehow it feels as though there will be more shocks to come. Things are not nearly as fragile as in 2009, but I don’t think we are through this one yet.

If that is right, how to explain the not-too-bad performance of equities on both sides of the Atlantic? The S&P 500 is currently up around 7 per cent on the year to date, though well down on its peak at the end of 2021.

The FTSE 100 is up 2.5 per cent, though off its peak of February this year. Put it this way: equities are not pricing in a serious recession, or even the sort of dismal longer-term outlook predicted by the International Monetary Fund.

Its managing director, Kristalina Georgieva, said last week that the Fund thinks global growth over the next five years will be around 3 per cent, the lowest since the early 1990s. Equity markets look forward, so if growth is going to be weak, how will companies make sufficient profits to justify current ratings?

There is one clear difference between the US and UK markets in that American companies are much more highly rated than their British or European counterparts. Shell is on a price/earning ratio of 5.5, while Exxon is on 8.7. But they are broadly similar enterprises.

This sort of disparity has led to the idea that companies should shift their listings to New York, but that seems an odd argument. After all, global investors are perfectly capable of buying shares wherever they happen to be listed, and the canny money is coming into UK and European markets precisely because they offer better value than US ones.

In the medium term, I expect these disparities to diminish, the questions being the timing, and whether this will involve a down-rating of US equities or an up-rating of equities here.

There are also more subtle differences. In the US there is a tug-of-war between fears of recession (highlighted by Jamie Dimon, head of JP Morgan, last week – see page 78) and hopes that pressure on the banking system will encourage the Federal Reserve to ease up on interest rates.

Here the tension is more between the fact that the UK economy remains out of fashion and at this point that our markets offer good value. I prefer the UK on the grounds that fashions eventually reverse themselves and that buying cheap must be a sensible policy for long-term investors.

So what’s to look for through the summer? Five thoughts, against which people can benchmark their own expectations. First, the dollar’s decline may well gather pace. Remember those dire predictions that the pound would go to parity? Well it is already back around $1.25, the highest for ten months, and my target would be $1.40 before the end of the year.

Second, equities will be bumpy through the summer, and I could see US equities hitting an air-pocket. But come the autumn, markets will be looking through to a reasonable recovery next year.

Third, UK growth will be decently positive this year, between 1 per cent and 2 per cent, which is much better than those dire IMF forecasts. Next year the outlook will look better still.

Fourth, inflation will be falling fast by the summer, with the possibility it will be close to 2 per cent by the autumn. Other major economies will see similar numbers.

A final thought. Years ago I was talking with someone from the Bank of England about their handling of the 2008 crash. ‘We didn’t do it well,’ they said, ‘but we did it well enough.’ While I expect some unpredictable economic shock in the months ahead, it will be handled well enough to make only a temporary dent to the wider outlook.