Danske Bank: Global Equity Strategy Briefer

Just came out to public. Here's the summary of thought:

Equity market’s ‚annus horribilis‛ is over

With 2008 having witnessed the fastest drop in equity prices since 1929, something quite extraordinary would be required to cause investors to further reduce their exposure to equities. The massive fall in equity prices over the past year or so means that the market has already priced in the bulk of the possible bad news that we could imagine happening in the coming year. In our view, additional bad news would be required to prevent equity prices going higher in 2009. As we have mentioned many times since equities began their ride of terror in September 2008, we do not buy into the notion of a global, European or US depression or protracted and deep economic crisis reminiscent of the 1930s or of Japan in the 1990s. Given this, we simply cannot foresee the S&P500 below 900 or DJ Euro Stoxx50 below 2400 (ie, zero performance) by the end of the year when looking at fundamentals.

Our belief is that the market conditions that the OECD economies (excl. Japan) have operated under for the past 20-25 years still prevail. A further bearish move down to say the S&P500 at 600 would, in our view, require a breakdown in the conditions that companies have been living with since the end of the 1980s. We, however, firmly believe that the current conditions will remain in place, and thus it will be the fading of the two crises – the systemic credit crisis and the global economic crisis – that will determine when the equity market rights itself.

Both crises have resulted in dramatic falls in leading economic indicators, such as the US‟s ISM manufacturing index, but we believe that both crises are about to peak and that 2009 will see decent price rises on equities – something that is also typical after exceptionally low economic activity, such as we are seeing in Q4 08 and Q1 09. As outlined below, the US ISM index has only dropped below 36 seven times since World War II – most recently in December 2008, when it fell to 32.4. What is interesting here is that the S&P500 has on average been 29% higher 12 months after the ISM fell below 36. Thus some-thing rather unexpected would be required to prevent equities from embarking on their usual climb out of the gutter in 2009. Essentially, a change in the conditions applying to the equity market is the only thing that can prevent an upturn kicking off in 2009 – and here we see deflation fears and developments in the housing market as the greatest challenges to the equity market in 2009.

If markets (all asset classes?) behave like during Great Depression, is it "Apples to Pears" comparing to the period after World War II? Consider as a PROBABILITY.