MSCI World May Lose 14% Before Bear Market Ends, History Shows

By Lynn Thomasson

July 14 (Bloomberg) -- The MSCI World Index, the global benchmark for stocks in developed nations that tumbled into a bear market last week, may not stop falling until it reaches a three-year low, if history is any guide.

The measure of 1,742 companies in 23 markets slid 1.1 percent to 1,345.47 on July 11, bringing the loss since its October record to 20 percent. A decline of another 14 percent would match the average slump of seven bear markets since calculations on the index began in 1969, data compiled by Birinyi Associates Inc. and Bloomberg show.

Shares around the world dropped for six straight weeks, the longest streak since October 2002, as losses and writedowns at banks exceeded $400 billion, oil prices rose to a record and growing concerns about the health of Fannie Mae and Freddie Mac caused their stocks to plunge more than 60 percent. Companies in the Standard & Poor's 500 Index will report a 14 percent decline in second-quarter profits, according to estimates of analysts compiled by Bloomberg.

``It is unlikely we have seen the low point for equity markets,'' said Tony Dolphin, director of strategy and economics at Henderson Global Investors in London, which oversees about $125 billion. ``The next few months will see worse news on economic growth, profits and inflation, and worries about the financial sector are also likely to persist.''

Previous Bear Markets

The MSCI World's retreat has lasted 257 calendar days. In the seven previous bear markets, the index fell an average of 31 percent from its peak over 391 days, according to data from Birinyi Associates, the Westport, Connecticut-based research and money management firm founded by Laszlo Birinyi.

A similar drop would send the MSCI World down to about 1,160, a level it last closed below on July 8, 2005. The index at that point had advanced 64 percent from its previous bear- market low of 703.70 on Oct. 9, 2002.

The five-year bull market that ended on Oct. 31, 2007, was the MSCI World's third-longest, as the index posted a 139 percent gain over 1,848 days, data from Birinyi and Bloomberg show.

Stock indexes in Japan, France, Germany, Hong Kong, Australia, Switzerland and Italy already fell more than 20 percent from their highs -- the common definition of a bear market. The MSCI World passed the threshold last week after the S&P 500, the benchmark for American equities, and the U.K.'s FTSE 100 Index also entered bear markets.

Financial Shares Tumble

U.S. and British financial companies and homebuilders led the drop after the worst U.S. housing slump since the Great Depression drove bank losses related to subprime-contaminated securities to $410 billion and forced lenders to raise almost $325 billion. The MSCI World Financials Index slid 28 percent this year, the steepest decline among 10 industry groups.

Fannie Mae and Freddie Mac, which own or guarantee about half of the $12 trillion of U.S. mortgages, and Lehman Brothers Holdings Inc., once the biggest U.S. underwriter of mortgage bonds, lost about three-fourths of their value in 2008. Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders. New York-based Lehman declined 17 percent on July 11.

Taylor Wimpey Plc, the U.K.'s largest homebuilder, is the only stock in the MSCI World to drop more in 2008, losing 81 percent. The London-based company may need cash to avoid a default on its 1.7 billion pounds ($3.4 billion) of debt in the worst U.K. housing slump since 1978.

Gloomy Consumers

British house prices fell by the most since 1992 in June, and consumer prices jumped 3.3 percent in May from a year earlier, the most since at least 1997.

The surge in oil, which climbed above $147 a barrel last week, helped send consumer confidence in Britain to the lowest since the poll tax riots 18 years ago. American shoppers are even more pessimistic, with U.S. consumer confidence near the lowest since 1980 after six months of job losses.

``You've got a situation where all the major growth engines of economies around the world are slowing down,'' said George Feiger, chief executive officer of Contango Capital Advisors, which oversees about $2 billion in Berkeley, California. ``It's going to be sluggish coming around.''

Companies dependent on discretionary spending by consumers lost 22 percent this year, the second-steepest drop among the MSCI World's 10 industry groups.

London to Las Vegas

Marks & Spencer Group Plc, the U.K.'s largest clothing retailer, slid 59 percent as the London-based company's sales dropped the most since 2005. Las Vegas-based MGM Mirage and Las Vegas Sands Corp. retreated 71 percent and 67 percent, respectively, as gambling revenue from the Las Vegas Strip declined for five straight months.

This year's decline left the MSCI World valued at 14.1 times the profits of its companies, the cheapest since at least 1995, according to weekly data compiled by Bloomberg.

Financial companies trade at the lowest in at least 13 years, with a price-to-earnings ratio of 9.7, while the MSCI World Consumer Discretionary Index is valued at 17.7 times earnings, the cheapest since March 2006. Those prices aren't low enough to lure some investors.

``I've been very pessimistic about the banks and consumer stocks for some time,'' said Patrick Evershed, a London-based fund manager at New Star Asset Management Ltd., which oversees $41 billion. ``I cannot see any relief any time soon.''

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.