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Cautiously Re-Enter Stocks, Await Early Signs Of Falling Risk - JP Morgan
Tom Burroughes
6 January 2009
Investors should gradually put money into relatively risky assets such as
“In uncertain markets such as these, it makes perfect sense to dribble money in on a regular basis,” Tom Elliott, global strategist at the investment firm, said in a note. A significant and sustainable rally in stocks is unlikely to occur until all unpleasant economic surprises are out of the way and until leading indicators of risk, such as the spread between interbank interest rates and official rates, have moved, Mr Elliott said. At present the gap between the Bank of England official interest rate and three-month Libor is about 45 basis points. In calmer economic conditions, Libor tends to closely follow official interest rates. “A continuing decline in corporate earnings and earnings forecasts, together with fears of a bubble in government bond markets and low bank account cash rates, will be a feature of the first half is not so different from consensus within the City, which sees a recovery taking place in 2010, fuelled by large increases in public spending and continuing loose monetary policy,” Mr Elliott’s note said. Mr Elliott said stocks, corporate bonds and other “risk” assets tend to move six months or so ahead of changes in the real economy, so a sustained stock market rally could be under way as early as the third quarter of this year.