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What is the outlook for the global equity markets in 2008? Which are the best investment strategies for the year ahead? Will the rate cuts by the Fed, the ECB and the Bank of England result in a new bull market? Or will the problems caused by the credit squeeze continue to cause problems? What are the prospects for sectors such as financials or mining? And will emerging markets continue their strong run?

Graham Secker, chief UK equity strategist at Morgan Stanley, answered your questions on Friday January 4.

What sectors or industries are best to buy stocks in for early 2008?
Mark Ulatowski, London

Graham Secker: We believe that 2008 will be a difficult year for investors given the prospect of much weaker economic growth in US and the UK - therefore for the next 6 months or so we’d recommend investors focus on cash preservation - this means looking for stocks within defensive sectors. Many defensive stocks are already quite expensive - the best value can be found in telecoms and pharmaceuticals, but the likes of utiliies should also do OK.

Will Techs and Health Care be the runners for 2008?
Frank, Germany

Graham Secker: Tech is really just a quasi cyclical and is at risk from a slowdown in capex spending - corporate earnings in the US are now down compared to last year and capex tends to follow earnings with a 2 quarter lag - hence capex should be slowing by the summer. Therefore, we’d avoid tech.

Healthcare looks a better bet to us despite the impending US election - the sector is as cheap as it has ever been and expectations are very low - while there are few signs of an improvement in industry fundamentals, its lack of cyclical exposure should mean the sector outperforms a falling market over the next 6 months.

Do you think the credit squeeze has not filtered through to the real economy yet and that as a consequence there is a lot more bad news to come in the financial arena, making markets tumble once again through the first quarter before they recover any lost ground?
Jose Mara de Arcas, Madrid

Graham Secker: I think this scenario is likely to prove very accurate - we think equities could fall by 10% in the first half of this year as the credit squeeze impacts the real economy and sends the US - and maybe the UK - into recession. Such an event is not currently priced in to equity markets.

Are US retail, real estate and industrial stocks a buying opportunity, considering they are potential buy out targets by cash-rich firms in the Middle East and South Asia, that want to expand their product portfolios in existing markets and also make a presence in developed markets?
Shamit Chokshi, Mumbai

Graham Secker: This depends on your time horizon - many SWF investors from Asia and alike have very long time horizons and hence are happy to buy into these areas today. We think it is too early for regular mainstream investors to increase exposure here as there are substantial earnings downgrades to come and this should drive share prices lower.

Not so long ago, many commentators were highlighting global imbalances (especially the US trade deficit) as the biggest threat to world growth. Do you think that the devaluation of the dollar is sufficient to redress the imbalance? On a similar theme; assuming consumption dips noticeably in the US, where do you see compensatory consumption coming from to maintain world growth? Which stocks will likely benefit from this rebalancing scenario?
Gary Coathup, Evesham, UK

Graham Secker: While the devaluation of the dollar has helped mitigate some of the threat to world growth we doubt it has been enough. As the US economy slides into recession in 2008, we’d look for increasing protectionism out of the US and this will reduce global trade and GDP.

Near-term the biggest risk is from the credit crunch and its impact on reducing the spending power of anglo-saxon consumers. We doubt that the rest of the world can de-couple from this and expect aggregate GDP growth from the US, Europe and Japan (c. 70% of global GDP) to be no more than 1 to 1.5% this year.

With media coverage centred on troubled financial institutions, many shares appear to be going cheap. It is my view that in the long run an eventual recovery in share price will prevail. However, with a slowing global economy as well as problematic balance sheets and trading environments likely to continue at least for a while, do you think that fundamental values or market sentiment will prevail in the medium term?
Adam Keats, London

Graham Secker: Many shares look cheap but this is likely to prove illusory as the economic slowdown will depress corporate earnings and turn these stocks into value traps. Investors need to be patient at this point and we would wait until sentiment, newsflow and earnings deteriorate further.

It is generally viewed that interest rates in the US and UK will fall by at least 50 basis points in 2008. Even Europe is likely to ease - eventually. Is there therefore not a case that most markets are likely to rise this year as rates fall -or do you believe that these expected reductions in rates have already been factored in. Are markets therefore even more likely to struggle from 2009 as the monetary easing causes higher inflationary pressures in world economies?
Geoff Nye, Essex

Graham Secker: The impact of lower interest rates on equities will depend on the economic outlook - if the US economy is going into recession then lower rates won’t help equities rise in the next six months. However, if you believe - which we don’t - that lower rates can help prevent a recession then you should be buying equities today. Economic recessions tend to be de/disinflationary, so we are not currently too concerned about inflation in 2009. However, in the short term inflation is likely to remain sticky and may dissuade some central banks from cutting rates as much as they would like to.

Will there be a recession in UK and if so, how will it affect FTSE?
Lila Vadgama, Stanmore

Graham Secker: We think there is a reasonable chance that the UK economy will go into recession in 2008 and this is likely to continue to undermine the domestically exposed areas of the UK stockmarket. We believe the FTSE100 will fall in 2008 - particularly in the first half - and set a December 2008 FTSE100 target of 6300.

What is the outlook for IPO’s in 2008?
Dyrck Pisani

Graham Secker: Our cautionary view on economic growth and stock markets suggests 2008 won’t be a great year for IPOs. However there is plenty of liquidity within the global financial system and good quality companies with strong propositions should still be able to come to market.

Assuming Sterling falls by 5% to 10% against the US$ and the Euro in 2008, what are the best stocks to invest in (excluding ones with a high dependency on Anglo Saxon consumer markets).
Robert Donald, London

Graham Secker: Periods of sharp sterling declines were remarkably common prior to the mid 1990s. In these historic periods the best performing sectors tended to be the large-cap sectors that made a greater proportion of their earnings from overseas. Sectors that I’d highlight today as beneficiaries of a weaker sterling would include Oil, Pharmaceuticals and Telecoms. Real Estate tends to do very badly when sterling is weakening.

It has been suggested that the first half of 2008 will be in turmoil. Would it be wise to cash out of the market for this period of time?
Neil Jay Tillitt, Florida, USA

Graham Secker: Definitely - preserve your capital for greater opportunities ahead.

Every end of year pundits suggest that Japan will rise in the coming 12 months. With bated breath I wait and wait and wait... What is your view for 2008?
Brian, UK

Graham Secker: I wouldn’t hold out too much hope for a big recovery in Japanese stocks given that the domestic economy remains fairly weak and that its export-oriented sectors are at risk from a global economic slowdown. Plus, investors appear to be favouring ’growth’ over ’value’ at the moment - Japan is certainly not growth!

What is the outlook for the emerging equity markets in 2008? Which are the best investment strategies for 2008, with a high risk investment profile?
Carlos Ortega

Graham Secker: Emerging markets are likely to come in for a much tougher ride in 2008 than over the last couple of years and I’d expect to see some large share price swings. We forecast mid single digit returns overall from EM in 2008 - our preferred geographical area within EM is the Middle East.

What do you think the impact of US sub-prime crisis on Chinese financial markets will be? Bear in mind, a lot of Chinese financial institutions were not exposed to the same level as US and European financial institutions.
Qingfang Yan, Shanghai

Graham Secker: I am no expert on Chinese financials but I’d expect them to have significantly less exposure to US sub-prime than institutions in the western world. More generally there still appears to be plenty of liquidity within Asian financial markets and this may be negating the Chinese authorities efforts to tighten monetary policy and slow the economy.

The Irish stock market index has fallen 40% from its peak in 2007. Is it safe to get back in at this time, or should we hold off for further falls?
D McCarthy, Dublin

Graham Secker: I’d hold off for a bit longer yet - Ireland is at the epicentre of the current troubles given its high weighting in financials and building and construction stocks and while some of this is likely in the price we’d expect the fundamentals to get worse before they get better. It is also an economy that is highly exposed to capex and exports - both areas that are likely to suffer this year.

About the expert

Mr Secker has been chief UK equity strategist at Morgan Stanley for 5 years. He is also a member of Morgan Stanley’s European strategy team that was voted number one in the latest Extel survey. Previously, Mr Secker worked in the equity strategy team at UBS from 1997 to 2000.

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