Equity markets may rebound to start the year, but BCA Research cautions that the macro environment is still risky.

In a research note, BCA reports that last year’s selloff left global equity prices down nearly 50% from their cyclical highs, making this the second deepest bear market in the past 40 years.

“In other words, a lot of bad news has been discounted as sentiment became crushed and investors rushed for safety. It now appears that selling pressures may finally be abating: equity prices have edged higher in recent trading days on the back of tentative improvements in the credit markets and an easing in implied option volatilities from sky-high readings,” it says.

“Upside momentum could persist in the weeks ahead as investors and money managers reposition their portfolios and redeploy some of the cash piled on the sidelines. That said, it is difficult to see how equities can sustain an advance until the monetary transmission mechanism begins to function more normally,” it warns.

Also, BCA says that the poor earnings outlook will be a persistent headwind for stocks throughout 2009 and analysts are likely to be disappointed in their overly optimistic profit forecasts: earnings could fall by as much as 25% to 30% as revenue growth slows and margins contract, it suggests.

“Equities seem poised to edge higher from oversold levels but a sustained advance will rely on the stabilization of credit markets,” it concludes.

IE