By Jeremy Gaunt, European Investment Correspondent
LONDON (Reuters) - Predicting what financial markets will do at the moment is more than a mug's game, given massive levels of volatility, but certain factors have arisen recently that may put investors in a new frame of mind this week.
First, there is the changing fear factor. After months of concentrating on the potential collapse of the world's financial system, the focus has shifted to worry about global recession.
Second, equity markets have fallen so far and so quickly that some investors are beginning to scent good value in them.
Third, the latest wave of company earnings is under way and should provide not only guidance of where things stand generally in the corporate world, but also which companies are best placed to thrive in it.
Reports this week will come from the likes of Caterpillar, Apple, Bristol-Myers Squibb, Xerox, GlaxoSmithKline and Daimler.
The key change for all assets may be a growing, if still tentative, belief that authorities have done enough with bailouts, liquidity injections and plans for a financial revamp, to halt the potential collapse of the world banking system.
South Korea joined the list of governments providing guarantees and capital injections on Sunday.
"People are beginning to extend their horizons beyond the current measures to support the banking system," said John Haynes, strategist at Rensburg Sheppards Investment Management.
Unfortunately for investors, when they do extend their horizons they come up against a deteriorating world economy which many believe is going to get worse.
A Merrill Lynch poll last week showed 84 percent of fund managers predicting a global recession. Economists polled by Reuters, meanwhile, see world output rising just 3.0 percent next year, down from 3.7 percent this year.
That is close to global recession by some definitions and is certainly well off recent trend growth.
Moreover, most of the economic data that has been released recently reflects activity before the financial maelstrom that has been the month of October.
As a result, investors will be looking closely at Friday's flash purchasing manager indexes (PMI) for the euro zone as a whole, and France and Germany specifically.
The flash PMIs give a steer on business conditions in the current month and will therefore be the first indication of how the "real" economy in at least one section of the world is coping with the crisis.
TIME TO BUY?
Despite the economic gloom, however, some investors are suggesting that the time is here -- or coming very shortly -- to buy equities again.
This is almost entirely based on value after massive losses, rather than any new optimism for world recovery.
MSCI's all-country world stock index, for example, has lost roughly 45 percent of its value since hitting an all-time high in November last year.
That translates into some $15 trillion being wiped off the value of the index, which is the broadest gauge of how equities are faring and a benchmark for institutional investors.
Put another way, it has lost in one year what it took four years to accumulate.
"We are massively, massively oversold," said Stephen Dowds, head of international equities at Northern Trust Global Investments. "We have overshot on the pessimism side."
Dowds reckons a "significant" stock market rally is due sometime soon as a result of this. He emphasized, however, that it would be a bear market rally, meaning that the gains would not herald a return to long-term upward trends.
Haynes, of Rensburg Sheppards, also sees value -- "Equities look attractive on a 2-3 year time horizon," he said -- and fund firms such as Fortis Investments have recently increased exposure to stocks.
But not everyone thinks the time is right.
Swiss bank UBS said on Friday it was retaining its preference for very high-quality corporate bonds and only defensive allocations in global equities.
"Until more convincing signs emerge that credit markets are recovering, we feel it is premature to re-engage more fully in global equity markets," it said in a note.
The two views would seem to argue for more volatility this week even if the wildest swings of recent days narrow.
EARNINGS GUIDANCE
The third driver of sentiment is likely to come from companies themselves, with third quarter earnings season now under way.
In previous quarters, companies outside the financial sector have generally shown some resilience, but they may now be starting to feel significant pressure from the financial crisis and deteriorating growth picture.
"Global earnings are already down 9 percent from their 2007 peak, on track with previous recessions," Citi analysts said in a note last week. "Our forecasts suggest that there is at least another 15 percent to go and that the profit cycle will not bottom until end-2009 at the earliest."
That said, there have been some positive surprises. International Business Machines (IBM.N) said last week it expects to meet long-term profit forecasts while internet search leader Google and chip maker Advanced Micro Devices posted results that beat expectations.
Northern Trust's Dowds said some negative projections have already been priced in to equities.
The key for investors, he said, would be to look at what the companies are saying about performance in 2009.
(Additional reporting by Simon Falush)
