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GLOBAL MARKETS WEEKAHEAD-Bear market endgame

TOKYO, March 15 (Reuters) - Investors will ponder this week whether the worst of a bear market in world stocks and other risky assets may be behind them as the resolve of central banks on monetary easing helped boost equities over the past week.

World stocks, measured by MSCI .MIWD00000PUS, rose more than 8 percent last week to post their strongest week since a record surge last November. Optimism that ailing U.S. banks such as Citigroup C.N are on the mend and "quantitative" monetary easing by major central banks would fix the global economy have boosted investor morale.

After a meeting in southern England, Group of 20 finance chiefs promised rescue money for troubled emerging market economies and renewed their pledge to fight the worst downturn since the 1930s. They stressed their commitment to use whatever tools necessary, including non-standard monetary policy, to get out of the current crisis.

This week, the debate on unorthodox monetary measures is set to heat up as the Federal Reserve and Bank of Japan -- where interest rates are already very close to zero -- meet to decide on policy as they tackle what the International Monetary Fund calls the “Great Recession”.

While economies keep contracting, stocks may have already started pricing in the end of recession and the beginning of a recovery. Some investment strategists estimate that equities reach a bottom up to five quarters before the trough in earnings and equities can rally three quarters before a recession ends.

David Rosenberg, chief North American economist at Bank of America Securities-Merrill Lynch, says in a report that bear markets tend to end roughly 60 percent of the way into the recession and the end of the current bear market may come sometime later this year. A bear market starts when an index falls 20 percent from a cycle high.

“October seems to be the month to circle on the calendar for the possible end-game,” Rosenberg noted.

“At this state, our work would suggest that there is another 70 or 80 points of downside potential (on the S&P 500 index)... Considering how far the market has come down, the silver lining is that more than 90 percent of the bear market is now behind us even with that possible last leg down we expect to occur.”

The benchmark S&P 500 index .SPX gained more than 10 percent last week, its third best weekly gain since World War Two. The surge came after it hit a 12-year low on March 6.

News that Citigroup, Bank of America BAC.N and JPMorgan JPM.N were all profitable in January and February boosted both U.S. and European banking shares. The KBW banking index .BKX gained 37 percent, and the DJ Stoxx European banks .SX7P rose 18 percent over the week.

NIGHT BULLS

For investors, when to move back into equity markets is a key question as high volatility could wipe out gains or losses very easily. They also tend to be averse to holding positions overnight especially during a bear market for fear of negative news depressing the market after the close of trading.

However, Goldman Sachs has found that there is a cost to be paid for avoiding overnight risk and this cost is important in deciding when to enter and exit long-term positions.

According to the bank, this is because investors who are reluctant to hold positions overnight sell at the close of trading, which depresses intraday returns, and buy at the open, which inflates the overnight performance during the close of trading and the start of trading the next day.

Take the S&P 500 index for example, which gained about 80 percent since 1993. Goldman estimates that if one held the S&P only overnight during this period, the cumulative return would have been 309 percent compared with -58 percent for a strategy that held the index only during trading hours.

Consistent with prior bear markets, the spread between overnight and intraday returns has increased since October, rising to about 9 basis points from a historical average of 5 bps.

It said a strategy of buying the S&P overnight and short selling it during the day would have generated a cumulative return of 507 percent since 1993 and 9 percent since the start of 2008. The bank added however this strategy is trading intensive and would entail higher costs than a simple buy and hold strategy.

BOTTOM CATCHING

While the process of getting back into the risky asset market could be slow, flows data already suggest that investors, scenting an end to the bear market, are dipping their toes back into equity markets.

Data from EPFR Global shows commodity, technology and energy sector funds, global emerging markets equity funds and Asia ex-Japan equity funds tacked by the firm all recorded inflows during the second week of March.

Money market funds, a bellwether for investor risk aversion, recorded net outflows of $381 million, with investors pulling cash from these funds in 3 of the 4 trading days to March 11.

Figures from TrimTabs Investment Research shows the pace of outflows from U.S.-listed all equity mutual funds is slowing to $8.8 billion in the week ending March 11 compared with an outflow of $19.7 billion previously.

“We have to recognise that we simply won’t catch the exact bottom, except via extreme good fortune. Valuation gives a good signal as to when to return to the markets. Buy when it’s cheap. If not then, when?” noted James Montier, strategist at Societe Generale. (Editing by Sonya Hepinstall)

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