Many financial assets across the world are looking cheap after the market ructions of the past year but investors in general have yet to rediscover the impulse to buy.
The mood appears to be so negative that even the odd bit of good news is quickly shrugged off by market players.
Consider, for example, last week's decision by Saudi Prince Alwaleed bin Talal to increase his stake in battered Citigroup because the bank's shares were "dramatically undervalued." A statement of confidence from a major investor? Definitely. Yet shares in Citigroup closed down 26 percent on that day.
With global stocks as measured by the MSCI index having halved in price over the past 12 months, many investors are looking for a catalyst to bring them back into the market.
This is proving highly elusive, given the drumbeat of bad economic news and the still wobbly financial system. Around 250 economists across Group of Seven nations told Reuters in a poll last week that they expected major economies to be in recession for as long as five quarters.
The Federal Reserve said the U.S. economy would contract until at least mid-2009. And the number of major layoffs announced across the world since September has now risen to at least 261,000 jobs—hardly conducive to a quick turnaround in consumer confidence.
The Organisation for Economic Co-operation and Development will give its latest view of the state of the world economy on Tuesday.
What many investors may need before they re-engage with riskier markets again is to see the trough of the investment cycle. The problem is, that is not always known until well after it has been reached. Indeed, the bottom may already be here.
"We are in the process of bottoming, but it is a process not a single event," said Michael O'Sullivan, director of global asset allocation at Credit Suisse's private bank.
"We are likely to do that for the next month or so." O'Sullivan reckons investors will want to see a lot of things take place before a new investment cycle kicks off, including continued improvements in credit markets, a pickup in consumer confidence, an end to the U.S. housing slide and the VIX index below 50.
The latter, sometimes called the fear gauge, can be seen as a measurement of expected stock market volatility. It is currently trading around 80.
LIGHT AHEAD? Perhaps reflecting this idea of markets bottoming, investors enter this week with a few ever-so-slight signs of improvement in sentiment.
Last week, for example, State Street's global investor confidence index hit a record low, but the November decline was small compared with a tumble in October. North American investor confidence levelled off almost completely.
Within a very gloomy Merrill Lynch fund manager survey, meanwhile, was a finding that fund managers had moved less underweight stocks than a month earlier—that is, they were still negative about them, but less so than before.
They were also less positive about bonds and cash, both of which are key defensive plays. In currencies, meanwhile, more respondents to the Merrill poll said the Japanese yen was overvalued than said it was undervalued for the first time since the current poll was launched about 7-1/2 years ago. Yen strength has been a key indicator of global risk aversion.
If there is a trend in this, it may become clearer on Thursday when Reuters releases its global asset allocation polls for November.
Last month's polls—which survey institutional investors in the United States, Britain, continental Europe and Japan—showed record low exposure to stocks and a high for cash.
All this may be small beer, however. State Street reckons the real turning point for markets will not come until it sees its institutional investor clients turn back into buyers. Flows suggest they are not yet doing so, it says.
DARKEST AT DAWN?
This week's focus is likely to be on banks, oil and earnings. Citigroup'stroubles have come just when investors had begun to think that the worst of the financial side of the crisis was over—albeit to be replaced by a global recession.
The bank has begun talks with the U.S. government as its plummeting share price raises doubts about its ability to survive, a person familiar with the matter said last week.
As for oil, its price has returned to the headlines because of its steep fall as deteriorating economies drain global demand. The price of crude dipped below $50 a barrel last week, marking a rough 65 percent decline since July.
This has combined with other price weakness to lead some investors and policy makers to see another problem heading their way—deflation.
On the corporate front, third-quarter earnings remain mixed, with Thomson Reuters data showing more than half of European company reports so far coming in under expectations.
But with gloom can come opportunity. Societe Generale analyst James Montier, a well-known bear, reckons value is growing on many stock markets. Looking at such measures as dividend yield to corporate debt yield, he finds that more than 10 percent of European, Japanese and British large cap stocks are a good deal.