Full recovery could be three years away

Susan Gosling

It could take between two and three years before the global financial system is fully sorted out, according to MLC Investment Management economist, Susan Gosling.

Gosling has used an investment briefing published by MLC this week to warn that the credit problems will take considerable time to work through.

“The impact on the real economy is also far from over,” she said. “Looking forward, what this means for equity markets depends on what’s already priced in.

“Over the past year there has been a dramatic shift in investor expectations and asset price declines reflect this. But it takes time for expectations to adjust fully, and also for all bad news to be fully revealed,” Gosling said.

She said that just as in boom, the market did not stop rising until the last pessimists had been converted.

However, Gosling said that just when investors were at their most pessimistic, prospective returns could be at their most attractive and that to exploit this emerging potential active stock selection was required.

“The market does not adjust evenly,” she said. “Sectors, regions and markets tend to adjust sequentially with the most obvious asset prices (in this case developed market financials) in the front line of initial adjustment, but as the flow-on effects are revealed, the pattern changes. Previously robust sectors can suddenly become vulnerable.”