Investors enter 2008 in fog of uncertainty

By Jeremy Gaunt - Analysis
LONDON Will the U.S. economy fall into recession and spread its woes elsewhere? Will financial markets dry up in a cash drought brought on by the subprime debacle?

With such Rumsfeldian "known unknowns" as a backdrop, global investors are heading into 2008 with less certainty and less consensus about what to do with their money than has been the case for some half a decade.

Consider the case of Legal & General Investment Management and Morley Fund Management, two large British investors.

L&G is looking to 2008 to produce what it calls "sogflation" -- soggy growth with persistent inflation. The result: It expects cash to outperform equities. Accordingly, it is underweight equities and neutral to overweight bonds.

Not far away across central London, meanwhile, Morley is expecting economies to rebound after a recent slowdown and for central banks to contain the credit crisis. The result: It is overweight equities and underweight bonds.

"Although we recognize the risks ... we expect economies to pick up steam from here," said Morley senior economist John Ip.

Such divergence should not, perhaps, be surprising given the kind of volatile year financial markets have had in 2007. After rising steadily for most of the year, major equity markets began ebbing and flowing sharply in summer.

On a year-to-date basis, for example, MSCI's main world stock index .MIWD00000PUS was up nearly 13 percent in July, down 1.5 percent in August, up 16.5 percent in November and is heading into the last weeks of 2007 up around 7 percent.