An unfamiliar phenomenon is floating around the investment world heading into 2009 - relative optimism. The key is the word "relative", but the idea is that the new year will bring an end to what has been a miserable time for many investors, who have seen global stocks close to halving and all kinds of riskier asset plays unwind. What is in store is certainly not any immediate return to the bull market days that preceded the credit crisis. But investors are nonetheless looking for a rebound. Some might argue that it has already started.
"People are positioning post-recession. That's what it's all about right now," said Charlie Morris, the head of absolute returns at HSBC Global Asset Management. "What we are seeing now is that prices are too low. People are looking through this mess." A major theme for next year is that while the global economy will continue to deteriorate - for the next few quarters at least - financial markets have already priced that in.
So where a firm such as Italy's Generali Investments is forecasting global growth at a recessionary 1.7 per cent next year, down from 3.2 per cent this year, it can project major stock market indexes to rise 14 to 15 per cent over 12 months. This is partly based on the notion that investment cycles tend to begin to recover before economic or earnings cycles. "Equity and credit markets usually get ahead of the economic cycle. So although GDP may not start rising again until the second half of the year, riskier asset classes may well do so before then," Michael Dicks, an investment strategy analyst at Barclays Wealth, told clients in a 2009 outlook.
Reuters polls of fund managers and analysts paint a picture of modest equity index growth next year, seeing high single-digit or low double-digit gains for developed markets, and emerging markets up about 20 per cent. Heading into next year, meanwhile, there are growing signs that a bottom of sorts to the financial market turmoil of the past year-and-a-half is being worked on. Sentiment data last month already suggested that while investors were gloomy, they were not getting gloomier. But now fund flows and other asset indicators are pointing to the same thing.
The fund flow trackers EPFR Global noted some signs of risk appetite returning in the second week of this month. Emerging markets equity funds tracked by the firm posted their biggest net inflows since mid-July, more than US$1 billion (Dh3.67bn). High yield bond funds also pointed to a modest increase in risk appetite. Stock market volatility has eased off substantially in the past two months, at least as measured by the VIX Volatility Index. The so-called fear index is down about 40 per cent from an October peak.
Another sign of renewed confidence includes the Baltic Exchange's chief sea freight index having its first positive month since May, suggesting an upturn in trade. And on stock markets themselves, MSCI's main world benchmark is flirting with its first monthly gain since May. It would be only its fifth in 18 months. "If we're in a 24-month recession, we're in the middle, and right now is when you would begin seeing the stock market recovering," Jim O'Shaughnessy, a Wall Street investor, told a Reuters investment summit in New York.
The key word from Mr O'Shaughnessy is "if" - for while investors are expecting a more benign year on financial markets in 2009, they are predicating this on the global economy falling into a normal, if severe and unpleasant, downturn. All bets are off if the recession turns into a depression. But that is neither widely expected to happen, nor something that investors can easily plan for. Merrill Lynch's monthly fund manager polls on Wednesday even showed some 26 per cent of respondents now expecting the global economy to be stronger than it is now by this time next year.
"Pessimism seems to be bottoming," said Karen Olney, a Merrill equity strategist. The general view appears to be cautious investing in the first half of the year, with riskier assets gaining later. Richard Lacaille, the global chief investment officer of State Street Global Advisors, one of the biggest funds in the world, said his firm expected to move out of cash as the year progressed. "Risk premia of gaining exposure to credit and equities is attractive," he said. "During 2009, we expect to be progressively moving towards them."
* Reuters China lures investors, b11
