Equity prices are starting to factor in a recession of the Australian economy, Platypus Asset Management chief investment officer Donald Williams said.
The percentage losses of stock prices since the beginning of this year are now on par with the losses of the 1987 crash.
"An earnings decline of about 30 per cent is currently priced into the equity market," Williams said this week at an Australian Unity briefing.
But it is not all bad news. Every bear market has historically been followed by a rally and Williams expects to see an upwards correction of at least 40 per cent, and possibly even 50 per cent.
"Worst case scenario... is that the market does get lower, but that would be matched by a significant rally, possibly as much as 50 per cent, starting some time next calendar year," he said.
But it is likely to take some time before investors regain confidence.
"It is unrealistic to expect investment sentiment to improve until people start to see some returns, and not just a quarter return, but a couple of quarters - maybe a couple of years of returns in some asset classes." Williams said.
Williams said risky asset classes will do generally better in the early stages of a recovery, while cash deposits are likely to perform the worst.
