At the risk of sounding repetitive, there seems to be very limited upside potential for the stock markets of the industrialised countries over a three to five years time horizon from end-2009 levels. This may seem surprising after a decade of stagnation on the markets: however, it is the result of the extreme overvaluation of equities at the end of the 1990s.

This time last year, I wrote that the New Year tradition of making forecasts for the year to come was an even more perilous exercise than usual. My reasons at the time were linked to the lack of visibility on the economic situation and the uncertainty on the banking landscape.

The inconsistencies that were predicted by many economists when the euro was introduced, but were masked by the favourable economic situation between 2000 and 2008, have now come to light with the problems in Greece.

In the following, I try to answer some of the main questions people have posted on the blog in the past few months.

Below, I offer some answers to five questions that have been frequently put to me.

You might be surprised at my reticence to believe in a sustainable improvement in the economic situation when every day the media seem to be presenting us with encouraging economic statistics. So here is a brief summary of my reasons.

There is no doubt that the recovery on the equity markets since March has been impressive. Since their lows of 9 March, the European and US markets have bounced back by around 45 %, while for some of the emerging markets, the figure was closer to 100 %.  And although the sharp recovery that started in March seemed to be gradually losing steam by May, the markets began soaring again in mid-July.

The first two quarters of 2009 couldn’t have been more different on the financial markets. While investors exhibited strong risk aversion in the first quarter, the second quarter saw the very same investors return to equities and high yield bonds.

Long-term government bonds have been badly hit by expectations of economic recovery and falling investor risk aversion. Since mid-March, long-term government bonds have slumped with the yield on the 10-year bond increasing by 150 basis points (1.5%) and 75 basis points (0.75%) respectively in the United States and in Germany.

In my article on 7 April (Bear market rally), I argued that the 20% or so rise on the markets between the beginning of March and the beginning of April represented a technical rebound in a bear market and not the start of a new bull market. Since the article was published, share prices have continued to rise, so it seems like a good idea to take another look at the arguments on which that conclusion was based.