UPDATE 1-KBW sees consumer-led recession through fall of 2008

(Recasts, adds analyst comments)

By Supantha Mukherjee

BANGALORE, May 21 (Reuters) - Keefe, Bruyette & Woods on Wednesday forecast a consumer-led recession that will extend through the fall of 2008, with the economy emerging from recession into slow growth in 2009, noting that would happen by next Spring.

But Federick Cannon, chief equity strategist at the brokerage, also expects more recapitalizations in the financial sector and U.S. consumers to repair personal balance sheets, retrenching on spending for the remainder of the year.

Cannon believes rising unemployment, higher food and energy costs and declining house prices will have an impact, but expects that by late 2009 consumers will have stronger balance sheets with banks possibly getting more active in promoting lending growth.

But for that to become a reality, he believes the sector will need to refurbish their own balance sheets.

"What has to happen is that we need to recap a significant part of the sector and the global investors with the money to provide for those recaps are going to demand a lot of ownership for it," Cannon said.

He said a lot more recaps in the sector are to come and may well be done at prices below where stocks are currently trading.

"As far as the best opportunity for investors, ultimately it would be financials, as they have gone down the most and they offer the best upside. But we think there is more downside to come first," Cannon noted.