Outlook 2009 from Fidelity International

Commenting on the outlook for markets in 2009, Trevor Greetham, portfolio manager of Fidelity's Multi Asset Strategic fund, says: "After a difficult 2008, next year promises to be no easier for investors. Global growth is slowing sharply in response to the broadening credit crunch and 2009 will see recessions in a number of countries. Markets are likely to remain extremely volatile as investors weigh up bad news on the economy against an unprecedented array of central bank and government stimulus packages. Rather than trying to time moves into and out of stocks, investors looking for a lower risk profile would do best to diversify their exposure across a range of asset classes or invest in a balanced fund.

"Having spent most of 2008 worrying about inflation, the possibility of deflation is now policy-makers' greatest fear. The collapse in commodity prices has seen the global economy move decisively from ‘stagflation' to ‘reflation', an environment characterised by weak activity and falling inflation. This stage of the cycle favours bonds over equities and cash. Government securities look like being an attractive asset next year as central banks continue to slash rates.

"Income will be at a premium as deposit rates fall sharply. For more adventurous income-seeking investors, corporate bonds look attractive. Yields are very high compared with those on risk-free government securities, although investors will have to brace themselves for a significant rise in corporate defaults from their current low levels.

"Equity investors face a tug of war between deteriorating earnings prospects and increasingly attractive valuations. Dividend yields are beginning to offer support, and shares look cheap when compared with both earnings and asset values. The worst of the banking crisis is probably behind us and consumer stocks have already moved to discount a severe recession.

"Interest rate-sensitive sectors such as consumer cyclicals and defensive areas such as staples and healthcare will be the most attractive areas for equity investors. Financials are likely to outperform industrials.

"The residential property market will continue to fall, although the rate of decline will slow as the impact of lower interest rates begins to be felt. Commercial property will continue to be affected by a shortage of credit as banks rebuild their balance sheets. However, the market is discounting a very poor outlook and property's sensitivity to interest rates could make it one of the next sectors to respond to stimulus.

"An easing in trade finance could see a spike in commodity prices because manufacturers have been forced to run down stockpiles of raw materials and may need to re-stock. A key indicator will be the Baltic Dry Freight index which could rise quickly if banks start to finance shipping again. It would probably be right to sell into such a rally. Commodity prices are likely to remain under downward pressure as industrial activity contracts and excess capacity rises.

"The decoupling thesis, which said that emerging markets could prosper despite a slowdown in the developed world, has been tested to destruction by synchronised recessions in several of the world's largest economies. Developed market equities will continue to outperform emerging markets. The US market, especially, will benefit from its relative diversity, heavy exposure to consumer staples and healthcare stocks and the likely continuing strength of the dollar as overseas interest rates fall towards U.S. and Japanese levels.

"One of the surprises in 2009 could be a recovery in US consumer spending from its current depressed levels on the back of falling energy prices and lower mortgage rates.

"At some point, though possibly not next year, reflation will move on to full-blown recovery and a sustained bull market in equities. For me to become bullish, I will need to see signs that policy ease is taking effect, banks are lending again and bargain hunters are coming in to support property prices.

"The watchwords for investors in 2009 will be caution and diversification. With attractive returns likely in the bond market and the potential for sharp bear-market rallies in the riskier asset classes, investors will be best-protected from unexpected swings by holding a balanced portfolio."