MSCI likely to lose 14% before bear market ends

London: 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 per cent to 1,345.47 on July 11, bringing the loss since its October record to 20 per cent. A decline of another 14 per cent 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 per cent. Companies in the Standard & Poor's 500 Index will report a 14 per cent 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."

The MSCI World's retreat has lasted 257 calendar days. In the seven previous bear markets, the index fell an average of 31 per cent 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 per cent from its previous bear- market low of 703.70 on October 9, 2002.

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

Indices

Stock indices in Japan, France, Germany, Hong Kong, Australia, Switzerland and Italy already fell more than 20 per cent 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 UK's FTSE 100 Index also entered bear markets.

US and British financial companies and homebuilders led the drop after the worst US 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 per cent 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 US mortgages, and Lehman Brothers Holdings Inc., once the biggest US underwriter of mortgage bonds, lost about three-fourths of their value in 2008. Washington-based Fannie Mae slid 45 per cent last week, while McLean, Virginia-based Freddie Mac sank 47 per cent on concern they may require a bailout that would wipe out shareholders. New York-based Lehman declined 17 per cent on July 11.

Taylor Wimpey Plc, the UK's largest homebuilder, is the only stock in the MSCI World to drop more in 2008, losing 81 per cent. 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 UK housing slump since 1978.