Avoid stocks as recession bites: BlackRock

LONDON (Reuters) - It is still too early to make a wholesale commitment to buying equities as corporate profits could easily fall by 30 percent in a "quite unpleasant" recession, a top strategist at BlackRock Inc (BLK.N) said.

Ewen Cameron Watt, chairman of the US fund group's central strategy group for Europe, the Middle East and Africa, said by historic standards the equity risk premium looks attractive. But corporate profits are still above the long-term trend in most developed markets, and are likely to be hit by tighter credit markets.

Although there has been some easing in the money markets in the last few days, investors are concerned that the banks' need to rebuild their balance sheets will hurt the corporate sector.

"If credit doesn't start to get rolled over through the commercial paper market, or issued, then companies are going to be running themselves in a kind of stone-age capitalism, where activities will be very seriously constrained," Watt argued.

LIQUIDITY SHOCK

The turmoil in the financial system - and how quickly this subsides - will have an impact on how deep and how long the recession is likely to be.

Watt said that recessions are normally induced by an inflation shock or an interest rate shock, but this time it had been induced by a liquidity and solvency shock. In this kind of recession, corporate profits could fall around 30 percent, he said.

"We're in the early stages of a quite unpleasant recession so a wholesale commitment to buying equities is probably a little bit too early," he said.

He said if leading indicators bottom out after six to 12 months, then equities are probably decent value now. But if the downturn goes on a lot longer, then although there may be some recovery in equity markets in the short term, they will probably trade sideways for a fair period after that.

CREDIT OPPORTUNITIES

BlackRock still favors segments of the fixed-income market over equities: "That's where the best opportunities are," Watt said.

As an example, he pointed out that Diageo PLC (DGE.L) recently came to the market with a new issue at over 7 percent, "which is a very nice rate for a company with as strong a credit capability as Diageo."

He added that the gloom about the economy was justified. "Anyone who believes in a V-shaped recovery is smoking something unusual. But we're probably past the point where people are going to dig a hole and put all their money in a tin box in the garden."

(Editing by Erica Billingham)