Global stock rally stunted, but still has legs

By Nigel Davies

LONDON (Reuters) - Stubborn recession brought a dose of reality to the strong rally that hoisted the world''s stock markets from their March lows, and will keep a check on gains until the end of the year, Reuters polls showed.

Investors found green shoots wherever they looked in March, driving 50 percent gains in world shares and wiping out much of the deep losses they sustained in 2008.

But with no end yet in sight for the deepest global recession in decades, despite interest rate cuts and monumental stimulus packages, most analysts say only modest gains are likely for the rest of the year for both major and emerging stock markets.

Quarterly surveys of more than 150 equity strategists from New York to Sydney showed the main U.S. S&P 500 index rallying a further 8 percent by the end of the year, European shares up 3 percent, and Australian stocks up 6 percent.

Tokyo''s Nikkei was predicted to hold flat, ending the year at 10,000.

Strategists were satisfied that stocks would not revisit the dark lows of March again, even if the whiff of a bear market rally still lingered.

"Equity markets have entered a phase of reality checks, during which the expectation-driven rise from the March lows has to be beefed up by hard economic data," said Gerhard Schwarz, head of global equity strategy at UniCredit.

That would provide a base for an improvement in the earnings outlook for companies, which could suffer further shocks as results trickle out in July. The recession has already taken out a host of investment banks and car manufacturers, and sent unemployment soaring.

But prospects for at least modest gains has investors rushing back into equities. Separate Reuters polls showed global fund managers growing more optimistic on stocks.

That optimism has been in part fueled by a slide in volatility as measured by the VIX index, now back to levels seen last September before investment bank Lehman Brothers fell victim to the financial crisis and rocked the world''s markets.

The equities surveys showed that Russia was likely to perform the best this year among the BRIC pack that comprises Brazil, Russia, India and China, with its index set to rise a further 17 percent on top of the 50 percent it has already gained this year.

That may go some way for making up for the more than 70 percent fall it suffered last year. Brazilian gains for the rest of the year are forecast much more in line with other major markets, rising a further 5 percent by the end of the year and cancelling out last year''s falls.

Most strategists said the global economy was not keeping up with the pace of recovery investors had hoped for.

"The economy has really not turned up," said Carl Birkelbach, chairman and chief executive of Birkelbach Investment Securities in Chicago. "As far as investors are concerned, they are happy that at least we avoided the Great Depression."

But a decent pick-up in economic growth was not likely until late this year at the earliest, say economists.  Continued...