* Investment bank recommends defensive stocks, cash, bonds
* Increased volatility seen ahead
* DAX expected at between 4,500-4,800 points by end-2009
* DJ STOXX 50 seen at 2,250-2,400 points at end-2009
By Tyler Sitte
FRANKFURT, June 17 (Reuters) - Stock markets will likely correct by year-end as they retreat slightly from recent gains and investors should favour defensive stocks, higher cash positions and bonds, experts from Sal. Oppenheim said on Wednesday.
The investment bank, which has total assets of around 41 billion euros ($56.83 billion) and is one of Europe's largest independent banking groups, said its new outlook for the second half of the year broke from its early forecast and it was now more conservative than the market consensus.
"The lion's share of the world economy is still in a recession. The mid-term term growth outlook is moderate at best as it will likely take several years to work off imbalances," said Dieter Pfundt, personally liable partner and head of investment banking at Sal. Oppenheim.
Matthias Joerss, head of the bank's equity strategy team, said the "spring fairy tale", which supported equity markets earlier this year would likely lose momentum by summer.
"The second half of the year will be characterised by a period of volatile corrections and lateral movement," Joerss said, pointing to likely further downward revisions in company earnings estimates and continued overcapacity.
While Germany's blue-chip DAX index may temporarily move as high as 5,300-5,500 points in 2009, Joerss sees the index ending the year in a band of 4,500-4,800 points.
The Dow Jones Stoxx 50 index of the top 50 European large caps will likely move between 2,100 and 2,700 points throughout the second half of the year and close out 2009 in a range between 2,250-2,400 points, Joerss added.
TRANSPARENCY IMPORTANT IN PICKS
"The rebound seen by banking stocks, cyclicals, and capital goods will likely run its course and there will be a return to defensive stocks, including healthcare, consumer goods, telecoms, food stuffs and utilities," Joerss said.
Among European large caps, Sal. Oppenheim's recommendations include Allianz, Bayer, Credit Agricole, GDF Suez, RWE and Philips as part of a defensive portfolio.
The bank views a highly visible business model and high dividend payout as important factors for equity picks.
For German small and mid caps, the bank prefers Aareal Bank , drug supplier Celesio, retail bank Deutsche Postbank, technology group Gea, biotech testing specialist Qiagen and internet service provider United Internet.
INVESTORS SETTLE FOR LOWER RETURNS
The bank also suggested that at least in the mid-term investors might have to remain content with lower returns.
"Our clients used to ask how they could achieve (returns on investment) of 10 percent plus. These days investors are asking, 'How can I keep the value of my investment stable?' Under these conditions an investor who sees a return of 5 percent is satisfied," Pfundt said.
The bank recommends higher cash allocations and investments in liquid government bonds to help weather difficult markets.
Corporate bonds might also be enticing for investors.
"The corporate bond market is a main competitor to the equity market and as long as spreads remain where they are this will continue," Pfundt said.
A commonly held view that stocks are undervalued was not entirely accurate, the bank contends.
"Valuations might look attractive, but estimates for 2010 are still much too high," Joerss said.
"On the other hand, we can't really say the market is overvalued, because that would mean using company earnings during a recession as a yardstick to determine value."
Instead, Sal Oppenheim sees a gradual return to historical profit levels which are somewhere between these two extremes. ($1=.7214 Euro)