In 2009, investors should expect a sharp and sustained rally in global stock markets and should not necessarily wait for good economic news before shifting to stocks, according to Ralph Goldsticker, managing director of research at Mellon Capital Management, one of the asset management businesses within Bank of New York Mellon.

The consensus is that we are now facing a global recession, with significantly reduced corporate earnings expected.  However, equity prices seem to have fallen much further than is justified – analysts have forecasted a drop in future corporate earnings of around 12 per cent for 2009, but at the same time, since the start of 2008 the MSCI Morgan Stanley Capital International World Index of developed countries’ equity indices plummeted by 43 per cent. 

Investors may have overreacted to the financial downturn, pricing in a far worse recession than may actually occur.  If the slowdown is in line with the economists’ and security analysts’ forecasts, global stock markets should recover much of the ground that they have lost this year as investors incorporate more realistic expectations into their investment decisions, says Mr Goldsticker.

While the financial turmoil of 2008 has created a cycle of pessimism and high risk aversion, these cycles do not last forever, and investors should anticipate the stock markets to rapidly respond, says Mr Goldsticker.  A bullish view of stocks is further supported by a number of factors, including: the deleveraging cycle running its course; government intervention acting to ease the credit crunch; fiscal and monetary policy being utilized to prevent an overly long, deep recession, along with the fact that stock prices have fallen much further than earnings estimates.

Waiting for the good news from the impact of these factors is not a successful strategy, according to Mr Goldsticker. Historical precedent also indicates an overweight stance on stocks is now appropriate as stock markets typically turn five to six months before the economic cycle.  “History has shown that times of great fear are the best time to buy stocks and the worst time to buy bonds,” he adds.

While a dramatic rebound can be expected in the stock markets, Mr Goldsticker advocates going underweight on the US dollar.  While factors such as a “flight to quality”,  deleveraging and the repatriation of assets have supported the greenback, he predicts that once the current climate of fear abates the dollar will fall to a level consistent with fundamentals.   However, he warns that few can call the bottom of such cycles and waiting for evidence that the economic cycle has turned is unlikely to be profitable.