World stock markets seen bouncing, many down for year

LONDON (Reuters) - Many stock indexes worldwide are expected this year to suffer their first overall drop in six years but there is still scope for a significant bounce from the steep falls suffered so far, based on the belief that any U.S. recession will be short, a Reuters poll showed on Tuesday.

Global surveys of around 130 equity strategists and fund managers conducted last week and published on Tuesday showed all median forecasts for end-2008 from Taipei to Toronto were downgraded, and by as much as 25 percent.

But given that major stock markets are already down sharply this year, the poll results also promised across-the-board gains from current levels by year-end, from just 3 percent on the Toronto S&P/TSX to 28 percent on Mumbai's BSE Sensex.

The surveys were taken before financial markets were hit on Monday with the weekend news of JPMorgan Chase's firesale purchase of investment bank Bear Stearns in a move orchestrated by a US central bank that again relaxed its own lending standards.

And risk aversion is rising. Volatility hit a five-year high on Monday, according to the Chicago Board Options Exchange volatility index.

But many are looking ahead to the end, particularly given how aggressively the U.S. Federal Reserve has already slashed interest rates -- and is expected to do more later on Tuesday.

"After reaching a low around the middle of the year, equity markets are expected to rebound on expectations that 2009 will be better for global growth and on an end to the steady drip of bad news from the financial system," said Tony Dolphin at Henderson Global Investors.

Eight of the 13 indexes covered are expected to be down on the year, while five are expected to rise modestly. Back in December when the last poll was conducted the prevailing view was that the worst of the credit crunch would have passed by mid-year.

Now many analysts say it could take a year or more for banks to regain confidence to lend to each other for longer than just overnight or a few days.

More immediately market eyes are focused on Fed Chairman Ben Bernanke's latest interest rate decision, due later on Tuesday.

Market expectations have intensified from an already aggressive half-point cut in interest rates a few weeks ago to 0.75 percentage points to a full point.

The U.S share market, badly battered from recession fears, the damaged housing market and a record low for the dollar, is forecast to rally in the second half as aggressive interest rate cuts begin to take effect, the poll showed.

It gave a median end-2008 forecast of 1,500 points for the Standard & Poor's 500 index, a gain of 17.5 percent from Monday's close of 1,276.60. But that is significantly lower than the 1,613 forecast given in the December poll.

Median expectations for the Toronto's S&P/TSX were chopped aggressively -- in part as commodity prices are set to fall as the world economy slows. But Sydney is expected to rally nearly 20 percent from here.

Record gold prices above $1,000 an ounce and crude oil prices above $100 were seen as reasons alone for some stocks to eventually perform well later this year.

But in Tokyo, where investors have been awaiting a Nikkei rally for many years, disappointment may prevail.

Strategists sliced their end-year forecasts aggressively to 14,000 from 17,225 in December given the slowdown in the US economy and a rally in the yen to its highest against the dollar since the mid-1990s. That is damaging to exporters, a key engine of the world's second largest economy.

"It is almost certain now that Japanese companies will see profits decline in 2008 given the double impact of the stronger yen and high raw materials costs," said Takeshi Osawa, a senior fund manager at Norinchukin Zenkyoren Asset Management, who sees the Nikkei bottoming at around 10,000 around mid-2008.

Hong Kong's Hang Seng index, which rose so much during the course of last year that many analysts polled by Reuters gave up on trying to predicting where it would end 2007, is set for its roughest year since 2003, set to end 2008 down more than 8 percent. But that implies an interim rally of some 19 percent from current levels.

Meanwhile Frankfurt's DAX 30 is set to rally nearly 25 percent from current levels, leaving it down 4.5 percent on the year. But that is still a significant downgrade to what the median forecast pointed to three months ago.

(Reporting by Bangalore Polling Unit, Editing by Greg Mahlich)