2009 Global Markets Outlook By Pete Gunning, Global Chief Investment Officer Russell Investments January, 2009 Keeping perspective about the year ahead Given the extraordinary economic and financial pain investors experienced in 2008, we sometimes forget the big event that didn't happen. Despite myriad dire predictions to the contrary, the sky did not fall, the world did not end and the Armageddon-doomsday scenario did not occur. Instead, in early December, the National Bureau of Economic Research officially declared a recession in the U.S., which was not a surprise after the year we had lived through and the fact that many other countries had already stated they were in recession. Make no mistake about it, from many perspectives this has been the worst year most of us have ever witnessed. We hope never to have another like 2008. At Russell, we are extremely aware that our investors are frustrated and fearful, and we share your pain. But at the risk of seeming to minimize the experience of 2008, which is not the intent, it is important to put our economy in perspective: It's a very bad recession, no doubt about it, but it has not been the end of the world. Every day that we move forward in the markets is one day closer to recovery. In the interest of helping us all keep perspective, the following represents Russell's views about what lies ahead for the markets this year. No one here at Russell has a crystal ball, so we reserve the right to change our views along the way. If 2008 reminded us of anything it is that market events are very unpredictable. We hope you find this of value as we seek to keep you informed of the issues facing the markets. Russell's view on 2009 In 2009, Russell believes investors will experience a "tale of two perspectives." As they continue to absorb a constant flow of negative economic headlines, it may still seem like the worst of times. However, we believe the markets will anticipate a trajectory out of the current recession that will gain momentum in the second half of the year. Equity markets especially may begin to produce the rewards of better times before 2009 is out, and active managers will have ample opportunities to add value versus benchmarks. The headlines Russell believes the drumbeat of negative economic news will continue through the first half of 2009, even as government stimulus initiatives are being executed. Economic weakness will be reported by the media in lagging or coincident indicators such as unemployment and business failures, and new job growth may not be evident until the recovery has already begun. While the new Obama administration begins with high anticipation for massive, coordinated fiscal stimulus programs, we expect the programs' impacts will not be clear for months after their initiation. The markets Historically, equity markets have served as leading indicators of recession recoveries, and we think that will be the case this year. Although corporate earnings may continue to be disappointing in the first two quarters of 2009, earnings of many high-quality companies have not declined as much as their stock prices. This has made valuations on equities in general more attractive, especially compared to the safety play of near zero interest rates. Currently interest rate spreads on corporate credits are at historic highs, but even discounting earnings at these high rates equities look attractive. However, for more risk-averse investors, these record spreads leave us as optimistic as we've ever been about the prospects for corporate credits versus Treasuries. The message to investors: there are risks ahead and opportunities present; make sure your portfolio is well diversified and consistent with your objectives. We believe this should be a rewarding year. Active management Although 2008 was among the most challenging years ever for active investment managers, Russell believes 2009 will produce more favorable conditions for managers of both equity and debt strategies. The indiscriminate selling of risky and illiquid assets in 2008 should offer plentiful opportunities for the most skilful active managers to add value above and beyond a passive market allocation. In 2008, the markets were driven by fear and sentiment; Russell believes that we will begin to see a shift back to a fundamentals driven market. What this means is that on the equity side, we expect market volatility to moderate a bit from the elevated levels of 2008 while still remaining above average. The price-earnings ratio compression of recent years, which has tended to assign similar valuations to most stocks, will expand as the performance of stronger companies outpaces weaker companies. On the fixed-income side, the risk-aversion that blanketed virtually all corporate bonds in 2008 will abate, and bonds of fundamentally strong companies will generate price appreciation. We expect that the top tier of corporate debt instruments will outperform Treasuries in 2009 as the historically high yield spreads experienced in 2008 tighten back toward the historic range. As a global leader in selecting active managers, Russell will continue to rely on time-tested methods for evaluating management firm's strengths, while also making adjustments for the current environment. For example, virtually all managers lost assets under management in 2008, some have weathered the storm with their profitability and core competencies intact, while others have not. In 2009, our manager research analysts are paying special attention to managers' organizational and financial strengths. The value of perspective Although the current U.S. recession (which officially began in December 2007) now seems likely to eclipse all others of the past half century in length, investors should remember three key points in 2009:   Markets can overreact in beating down the prices of stocks and bonds, especially in the early phase of a recession. At the start of 2009, the depressed values of corporate equity and debt markets reflected nearly a "worst case" environment, at a time when fiscal stimulus efforts were finally starting to crack the global credit crunch. In times of deep uncertainty, such as the second half of 2008, all sectors of financial markets can fall under the same clouds of doubt. As uncertainties start to lift, the market rewards stocks and bonds of stronger corporations, and this in turn rewards active managers who can identify them. The stock market has a strong historical track record of anticipating economic recoveries months in advance. In fact, we believe the market may be starting to price in some signs of economic recovery now, and this trend will likely accelerate through the year. Although the severity of any recession can only be measured accurately with hindsight, investors who sit on the sidelines in 2009 may miss significant opportunities. Russell's analysis and models point to a slow and perhaps subdued economic recovery starting later in 2009, with the markets likely to recover before the U.S. economy does. We expect that global economies will recover later than the U.S. economy. However, we do not believe this should discourage investors from prudent risk-taking in the current environment, in anticipation of an eventual recovery and more rewarding performance. A very important part of our job at Russell is to help our investors understand our views so that it's easier for you to keep perspective. We believe that the ability to remain disciplined both in times of recession and prosperity is key to achieving financial security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The opinions expressed in this material are not necessarily those held by Russell Investments, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Copyright© Russell Investments 2009. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. The Russell logo is a trademark and service mark of Russell Investments. Russell Financial Services, Inc., member FINRA, part of Russell Investments. For information on the Financial Industry Regulatory Authority, go to www.finra.org. First used: January 2009 RFS 09-1464			Subscribe to our Education Center RSS Learn more about using and subscribing to RSS   Comment on this perspective What is your impression of Pete Gunning's insights? Provide your feedback.   Why Russell? See the difference Russell's investment approach can make   Printer friendly version of this page Send feedback or comments Site Search

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