By Natsuko Waki
LONDON, May 1 (Reuters) - World stocks, which posted historic gains in April, must clear big hurdles surrounding banks and economic data next week to silence those who still insist the eight-week upturn since March is a bear market rally.
The MSCI world equity index rose 11.5 percent last month, the biggest gain in its 20-year history. Now back at the January level, and up more than 30 percent since mid-March, it is almost break-even on the year.
While bulls have declared the end of the bear market and the beginning of a long-term rally, cautious portfolio managers who have kept their defensive asset allocation are watching for more signs that the "green shoots" run since mid-March can be stretched further and that an economic recovery is sustainable.
Next week's events that could be key in determining this include the outcome of stress tests on U.S. banks, earnings results from European banks, monetary policy verdicts from the euro zone, Britain, Australia and Norway and U.S. jobs data.
"We are still sceptical that green shoots will become a sustainable recovery. Our base line is that we have a very weak recovery next year and one can afford to take time before going into risky assets," said Alan Brown, chief investment officer at Schroders.
Schroders is underweight stocks and alternative assets, and overweight bonds especially in investment grade and high-yield paper as well as government debt and neutral cash.
Key corporates on both sides of the Atlantic, including Cisco Systems will release more earnings results next week. A slew of European major financial firms, including UBS, Swiss Re , BNP Paribas and Societe Generale, will also report.
So far, thanks to better-than-expected reports from major banks, more companies are reporting first-quarter earnings above analyst expectations.
Thomson Reuters data as of last week shows in the aggregate S&P 500 companies are reporting earnings that are 15.7 percent above estimates.
2009 forecasts of earnings per share for the S&P 500 have dropped to $60.01 at end-March from $109.21 per share in early 2008, suggesting that analysts' estimates reflect more reality now, according to London-based Fitzwilliam Asset Management.
The firm argues profit growth could now suffer after easy monetary policy of the recent past had boosted earnings.
"Given that actual monetary conditions are tightening, despite the extraordinary efforts of central banks across the globe, it is reasonable to assume that profit growth and earnings will head decidedly lower than the recent past," it said in a note to clients.
BULL/BEAR DEBATE
Barclays Wealth is also among those which choose not to fully participate in the green shoots rally. It is underweight cash, government bonds and developed equities outside the United States, preferring to add risks via corporate bonds.
"We're still worried about the world. We don't know if policies governments have adopted would work. We are somewhat less pessimistic compared with Q1 but we see a less-trivial chance of disaster," said Aaron Gurwitz, head of global investment strategy at Barclays Wealth.
"We're constrained in the risk budget. We want a decent upside and limited downside. Bonds by their nature are less risky than equities."
Credit Suisse says most major buyers of equities still do not believe in this rally and are on the sidelines, adding that retail investors will have to become involved as cash is becoming the least valuable asset given aggressive easing policies by central banks.
Corporates are net sellers, with four-week moving average of U.S. corporate net buying -- buybacks plus cash bids activity less IPOs and secondaries -- staying in negative territory, below the long-term average of just under $5 billion.
The Swiss bank says it will lower equity weightings if one of the following happens; sentiment indicators normalise; the S&P 500 rises above 950; credit deteriorates; the commitment to quantitative easing policy or financial bailouts wanes or lead indicators peaks.
It also notes that the 1992 bear market rally in Japan brought a gain of as much as 78 percent in dollar terms.
"Four out of the five preconditions for such a rally are in place -- high cash, lead indicators improving, spreads falling, housing inventory improving. We only just missed out on capitulation in early March," it said in a note to clients.
"If ever there were going to be a bear market 50 percent rally, now would be the time."
(Reporting by Natsuko Waki; editing by Stephen Nisbet)