Edward Bonham Carter, Jupiter's Chief Executive, comments on recent events and the outlook for stock markets:

"During the early weeks of 2009, investors were seemingly living in the hope and expectation that President Barack Obama and the global monetary authorities could wave some kind of magic wand to bring about a quick solution to the world's financial and economic problems. "This surprised us as we have believed for some time that the global economic slowdown would get worse and have warned that investors should expect stock markets to remain volatile. However, in recent days, the euphoria surrounding Obama's inauguration has worn off and investor attention has focused once more on the slew of poor economic and corporate data which suggests a worsening of the global economic environment.

"A variety of economic indicators such as house prices, car sales and manufacturing output have continued to deteriorate both in the developed and developing world. In addition, investors have taken fright over a range of corporate announcements, including HSBC's statement that it wants to raise £12.5bn in a rights issue, the loss of $61.7bn by US insurer AIG during the fourth quarter of 2008, the failure of internal accounting controls at UK sub-prime lender Cattles and the £1.4bn of losses incurred by nationalised mortgage bank Northern Rock in 2008. This newsflow has renewed concern that global financial firms may need more capital or even full nationalisation.

"Influential billionaire investor Warren Buffett has stated that the US economy is in a 'shambles'. Like us, he believes that while the torrent of economic measures being introduced around the world are essential, they could have unwelcome consequences, in particular, rising inflation. Yet, as he also points out, we have faced far worse travails and overcome them. We agree that while the 'path has not been smooth' the capitalist system has worked well over time. It will survive, albeit in some altered form.

No speedy resolution
"However, for the time being it is clear is that there will be no speedy resolution to the economic downturn. I continue to believe that disinflationary and deflationary forces will be with us longer than many previously thought and that unemployment will rise more sharply than expected as demand for goods and services declines. We have grown used to manufacturing price deflation (the result of cheaper imports from Asia). However, we could soon be in the unfamiliar territory of service price deflation.
"As I stated in my last update in January, it does feel like we are 'pushing on a string' ie: no matter what policy makers do - whether it is bailing out the banking system, announcing infrastructure packages or reducing interest rates to historic lows - the impact on economies seems limited. While there is a good chance of another cut in UK interest rates this week, the authorities need to take further action to try and lessen the length of the downturn. This means printing money - or to use the latest buzzword "quantitative easing". Reports suggest that the UK Chancellor could start to employ this strategy sometime in March.

"Given the difficulties faced by the global economy, a recession could potentially last well into 2010 in the UK. We should be prepared for a few 'false dawns' in the meantime and for the economy to bounce along to bottom before recovering. When a recovery does come, it is likely to be anaemic as consumers seek to clear the vast overhang of debts they have built up in recent years. If one were to visualise such an outlook, it would resemble more of a 'ladle-like' recovery than the v-shaped recoveries we have seen in the past."What does this mean for investors? For what it is worth, my view is that markets will remain volatile. While much of the bad economic and corporate news is priced in to shares, until we know where the 'bottom' is, investors will continue to swing between periods of pessimism and optimism. However, one is, in my view, starting to be paid for taking the risk of investing in equities on a three to five year time horizon.

Investor frustration
"In such an environment, it is understandable that some investors, who have seen stock market indices return to 1995 levels, may feel frustrated with equity investing. However, it is worth highlighting that while indices may have moved sideways in the past 10 years, the UK's best active fund managers have been able to make money during this period and one would expect that many will be able to continue to do so even if indices continue to move sideways, over the long term. Investors should also bear in mind that in such market conditions, averaging in exposure to the markets using regular savings schemes is particularly attractive for those investors who do not have a short term requirement for cash.

"The other significant question for investors is where they can get their income from. With interest rates in many countries at historic lows and likely to fall further, investors' income will have dropped to critical levels. To achieve higher incomes, investors will have to take more risk. Given that the credit crunch has exposed many complex 'manufactured' products as flawed - with capital often being sacrificed in pursuit of income - investors are more likely to seek out traditional income products, such as corporate bond funds and equity income funds."Profit warnings will undoubtedly increase. Some companies will have to cut their dividends and the overall yield on the market will fall as some banks put their dividends on hold. But there are still plenty of large, well-managed companies that will be able to maintain their dividends even in a recession. Being able to buy their shares on high yields looks significantly more attractive than the returns investors can get elsewhere.

"At Jupiter, our approach remains to invest in high quality companies with solid balance sheets that have the ability to grow in a difficult environment. It is part of the skill of Jupiter stock-pickers to identify which companies are likely to do well for investors over the medium to long term and emerge from this crisis in stronger positions than they entered it."

Please note that past performance should not be seen as a guide to future returns.  The value of an investment and the income from it may fall as well as rise.

NOTE
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. They are both subsidiaries of Jupiter Investment Management Group Limited and the group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances. Their views are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.