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With the global financial crisis shredding sharemarkets and prices in 2008, investors are constantly asking themselves when the worst may be over. Is the market at the bottom, or will it fall further? Is 2009 the year of investment opportunity?

High profile market watchers and participants put their cases for investing in the sharemarket, or avoiding it against a backdrop of economic factors.

Associate professor Steve Keen, of the University of Western Sydney, paints a gloomy outlook for the Australian sharemarket, property market and the global economy. It’s worth noting that Keen sold his Sydney unit for $540,000 in November 2008, because he believes the property market is way over-valued. Keen, now renting, says he paid $480,000 for the two-bedroom unit in 2005 and believes the same property will be probably be cheaper in 10 years’ time.

Why? The answer, according to Keen, is high levels of personal and business debt. Debt and the unavoidable deleveraging process here and overseas will plague global sharemarkets for years.

Keen expects the Australian sharemarket to trade sideways at today’s levels for at least three years before falling below 3000 points and then trending downwards. Today’s stocks retain built-in price premium from borrowed money that Keen says will be stripped out as investors are forced to reduce gearing levels. Share prices will fall in line with declining volumes.

“There’s a huge amount of debt to unwind in Australia and around the world,” Keen, of the university’s school of economics and finance, says.

US sharemarkets are way over-valued, particularly compared to Australia, and Keen says he can see the Dow Jones Industrial Average falling to 5000 points or possibly 4000.

“This is the biggest financial crisis ever, bigger than the Great Depression in terms of cause – high levels of debt,” he says. “It took 25 years for the Dow to recover its losses (points) in the 1929 stock market crash. It may take the Dow just as long to get back to its record high 14,000-point levels of October 2007, but people refuse to believe it’s possible.” He notes Japan’s Nikkei index trading at 7900 point levels on February 11 hasn’t come close to its all-time high of almost 39,000 points in late December 1989.

Australian households and businesses collectively owe $2 trillion, Keen says. Australia’s total debt-to-GDP ratio of 175 per cent effectively means that $1.75 is owed for every dollar earned. Rising debt levels during the economic boom years has pushed up asset prices to unsustainable levels, and he’s expecting weaker demand during an upcoming recession, interwoven with periods of negligible economic growth, to bring down share and property prices.

The Federal Government’s proposed $42 billion stimulus package is akin to putting a band-aid on a wound, and it won’t prevent unemployment climbing to 11 per cent within the next two years.

“The Government’s stimulus package doesn’t heal you because it doesn’t get rid of private debt,” Keen says. “Substantially cutting debt will lead to a stronger economy and sharemarket.” Keen says listed construction and consumer durable companies face their toughest times and some will fail. Major bank share prices are now at their peak.

But an alternative and brighter outlook is offered by CommSec chief economist, Craig James, who argues superior sharemarket returns will increasingly attract investors from the safety of cash in a lower interest rate environment. He says the reporting season reveals a good number of companies are at least maintaining dividends, while some are actually increasing them. Companies, with a strong and reliable earnings history, are offering double-digit dividend yields as their shares have been way over-sold.

James expects the sharemarket to rise this year as a growing number of investors sift out bargains, particularly among the punished blue chip stocks. “Professional investors don’t want to be caught behind the curve and fund managers can’t afford to drag their heels when it comes to asset allocation in a competitive environment,” James says.

The sharemarket is close to the bottom and James expects the ASX 200 to finish this year around 3800 points before a “much better 2010” followed by a stronger 2011. He says overseas credit markets are thawing and banks are beginning to lend to each other and selective businesses. All-important confidence is slowly returning.

James says: “The doom and gloom is over-rated – unrealistic. I think a lot of people are forgetting just how much stimulus – an unprecedented amount – is being thrown at this global financial crisis. We have always had recoveries in the past and it will happen again.” In Australia, James expects more stimulus from another sizeable cut in official interest rates in April. Unemployment will peak at 6 per cent levels.

James expects building material companies, such as Boral and CSR, to benefit from the Federal Government’s planned $42 billion stimulus package that includes huge infrastructure spending. Cash bonuses of $950, included in the package, will benefit Woolworths and Wesfarmers, while Leighton Holdings offers a strong order book in Asia and the Middle East. Australia’s major banks offer solid long-term growth prospects and are in much better shape compared to overseas financial institutions.

Peter Brain, executive director of the National Institute of Economic and Industry Research, says it will probably take the Australian sharemarket five years to return to its peak of 6853 points reached in November 2007 – if history is any guide. Brain says exchange rates need to be carefully considered before buying shares.

He says the Australian dollar could fall further against other major currencies amid continuing high current account deficits. He also believes that companies with exposure to relatively high levels of overseas earnings are appealing, provided they are not carrying too much debt. Brain says the balance sheets of banks are weaker as a result of the credit crunch and he expects share prices to remain under pressure in response to higher bad debt provisions.

Sharemarket veteran Michael Heffernan, of Austock, says global sharemarkets and economies will recover because governments won’t allow them to fail. He says the sheer size of US stimulus backed by a fresh-thinking Obama administration will turn around the US economy, before introducing tighter market regulations. As for Australia, Heffernan says, only a relatively small portion of stimulus is active because of the built-in time lag associated with interest rate movements, and the nation is yet to benefit from the $42 billion package.

Heffernan says national sales figures increased by a seasonally adjusted 3.8 per cent in December after the Federal Government handed out $10 billion to low-income earners and pensioners.

Expect a much bigger and positive economic response from $42 billion, more interest rate cuts and then possibly tax cuts. “The sharemarket will benefit – how can it not?” Heffernan says. “I have never seen such so much stimulus aimed at an economic downturn. It didn’t happen after the 1987 crash.”

Heffernan expects non-discretionary retailers, the major banks, the big miners and energy companies to recover strongly in line with a rising sharemarket. Health sector companies held up reasonably well during the downturn, so upside is limited. Heffernan expects the ASX 200 to finish this year 20 per cent higher from today’s levels.

“By 2011, I expect the ASX to be trading around its 2007 high of 6800 point levels,” Heffernan says. ” I expect to look back and say 2009 was a year of opportunity.”