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The question on the bourses: Is the worst over?

Investors begin the first full week of 2009 trading on Monday with one question in mind: Is the worst over?

Written by Reuters | London |
January 5, 2009 12:17:02 am

Investors begin the first full week of 2009 trading on Monday with one question in mind: Is the worst over?

Given that a 38 per cent loss on the broad US S&P 500 stock index last year was actually one of the better performances on stock markets,it is hard for some investors to imagine otherwise. Indeed,December ended on a rare up note,with global stocks putting in something of a rally. MSCI’s main gauge of global stocks,its all-country world index,gained almost 3.6 per cent for the month,its first gain since May and the sixth best performance in two years. Its generally riskier emerging market counterpart — one of the worst performers of 2008 with losses of 54.5 per cent — gained 7.6 per cent in December,also its first gain in seven months. So it would not be a major surprise if some of the most recent gains spilled over into the new year because many investors have argued that stocks are attractively priced. Many are also expecting financial markets to return to more normal patterns during the year.

Stocks are likely to recover in Q2/Q3 as the recession troughs in the US and other major economies,earnings begin to recover,led by financials,credit markets stabilise and deflation fears ease,John Praveen,Prudential International Investments Advisers’ chief strategist said in a note. But while few expect to experience again the kind of turmoil seen in 2008,there is little belief that any kind of new bull market is on the way. 2009 is likely to be another volatile year for stocks,Praveen wrote.

There is,meanwhile,little optimism when it comes to the global economy. The year has already started with gloomy signs of recession,including dismal US manufacturing data. This week’s big data report will come on Friday,when the United States issues its latest monthly jobs data. Economists are looking for job losses in the region of 475,000,which would be hefty,albeit an improvement on the month before.

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The jobs report is crucial because it reflects everything from business activity to likely consumer spending patterns. The more people out of work,the less spending,the less chance of recovery and so on. But while the state of the world economy will haunt financial markets,it does not necessarily walk with them hand in hand. Because investors tend to discount the future in the prices of their assets,investment cycles often recover before economic ones. It is for this reason that some investors are gloomy about the economic climate but less so about such things as stocks.

Whilst the economic picture is likely to deteriorate in 2009,the markets need not follow,Keith Wade,chief economist at Schroders,said. He noted the yields on offer from government bonds were now so small investors will perforce be attracted to other assets.

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