Opinion split on where markets are heading

Share investors have continued dipping their toes back into the market, with the major Australian indices rising for a second consecutive day.

Yesterday, the Australian share market posted its best one-day gain since December 8, 2008 in the middle of the first phase of the global financial crisis.

It remains to be seen whether, like that rally, this is what traders term a "dead cat bounce" - where markets plunge and briefly bounce off their lows before capitulating completely.

The ASX 200 is currently around 900 points off its March 2009 financial crisis low; that means there is still a lot of potential pain ahead if, as some economic commentators predict, the European crisis ends up being as bad or worse than the original GFC.

However, given many analysts and traders were factoring in a global depression in late 2008 and early 2009, it is hard to see how expectations could possibly be even worse this time.

Yet some of the more pessimistic analysts see this as a possibility.

Morgan Stanley global strategist Gerard Minack told ABC's Lateline last night that the break-up of the European Union's Economic and Monetary Union was now more than just a remote possibility.

"This strength in markets that we're seeing says about as much about how far they have fallen over the prior month as about the tangible prospect of getting a really big deal coming out of European policy makers," he said.

"We're talking about something much more worse than just a vanilla recession, and arguably something worse even than what we saw in 2008, because if we do see Italy come under pressure, it could be the trigger for disorderly, country-level and then banking defaults."

Mr Minack says he sees two possible solutions to Europe's woes: money printing by the European Central Bank (similar to what has been occurring in the US and Britain) to give the ECB the financial firepower it needs to defend its member nations; or a disorderly default by Greece, and then possibly other larger countries, that may lead to a disintegration of the eurozone.

Time for bargains?

However, not everyone is so pessimistic, with some fund managers seeing the economic as an opportunity to buy shares in good companies at cheaper prices - just as they did in March 2009.

Fund manager Roger Montgomery says one cannot run investment strategies always based on the worst-case scenario.

"Do we get up in the morning and cross the road saying, 'look, we might get run over - let's not do it', or do we say, 'well, I've got to get to work and I have to cross the road, so what's the safest way that I can do it?'," he told ABC Radio's The World Today.

"We just simply operate on the understanding that if we buy good businesses and we buy them at bargain prices, we're going to do better than the market because we're buying better quality businesses and we're buying them only when they're cheap."

Mr Montgomery says the widespread share market sell-off in recent months has hit good and bad companies indiscriminately, opening up the opportunity to find bargains.

Audio: Analyst says investors should resist urge to panic (The World Today)

"People get scared that there are going to be further losses in the future, and to avoid those, they get out now," he said.

"We see the volatility that results from that as being a very important investment partner on our journey."

Mr Montgomery says his fund had only around 10 per cent of its assets in the share market earlier this year, but this proportion has steadily increased as the market has tumbled over the past few months.

He says retail and finance seem to be offering the best value, as investors have abandoned the two sectors.

However, Mr Montgomery says investors need to be careful about which companies they pick, as cheap businesses are not necessarily good value, and neither are all so-called blue chip stocks.

"What investors need to look for is pretty simple - they need to look for little or no debt, high rates of return on equity, and bright prospects," he said.

"If you focus on those three things, typically you're going to be looking at the right places; the next step is looking for good value."

Posted in: World business