Markets are responding to the aggressive action taken by authorities to tackle the global economic crisis, according to research by Baring Asset Management, and while data from the real economy is currently painting a gloomy picture, the firm’s view is that the market is starting to look forward to a recovery.

Barings’ multi-asset strategies have been reallocating to equities since October 2008, as the market began to recover following the panic following the collapse of Lehman Brothers. Barings’ analysis of risk premia continues to support increased exposure to risk assets and the firm is now continuing to build positions with an increased focus on stock selection.

While profit falls of up to 30 per cent can be expected in both 2009 and 2010, Barings believes that equities are showing modest risk premia, especially in comparison with cash or government bonds. Furthermore, the firm anticipates that long-term, the downturn may even have positive outcomes for some companies.

“When the rebound does come, it is our expectation that those companies that have survived the downturn will see a more significant recovery in earnings, not least because they will face less competition for a few years, have made considerable cost savings and will likely have greater pricing power,” said Andrew Cole, director of asset allocation at Barings.

Barings anticipates that dispersions in country and sector returns will be much narrower in 2009 and 2010 than in recent years and it is stock selection that will provide a greater contribution to returns in the recovery.

“Equity managers should be asking themselves do they have the right bank, or the right oil company, and focusing less on whether their exposure to financials is high enough. Which stocks owned and which avoided will matter,” said Mr Cole.

Overall, Barings believes that the current consensus for the later part of 2009 and 2010 may be unduly pessimistic, especially in light of the action promised at last week’s G20 summit.

“In some countries the policy framework has been muddled which has led our recovery scores to have been trimmed back, but this is more a case of delaying rather than cancelling the bounce. It is hopeful that greater clarity will emerge following the united pledge last week by world leaders at the G20 summit in London to tackle the global downturn with a $1,100 billion package,” said Mr Cole.