By Natsuko Waki
LONDON, March 8 (Reuters) - Investors this week risk losing further faith in equities as the benchmark index nears a 14-year trough, firms around the globe cut dividends and policymakers struggle to come up with an effective crisis cure.
The week starts with a bi-monthly meeting of developed and emerging nation central bank governors in Basel, Switzerland and ends with a gathering of Group of 20 finance ministers in London, who are likely to scramble to find words of reassurance as deterioration in the global economy accelerates.
World stocks, measured by MSCI lost another 6.4 percent last week, with the index down 21 percent so far this year, falling in 8 out of 10 weeks and hovering close to a 14-year low.
"If you take a very long-term perspective, equity prices have brought you nothing over the past 12 years and dividends were the only thing but dividends are now being cut on top of that. This is affecting people's mind," said Joost van Leenders, investment specialist at Fortis Investments.
General Electric, JP Morgan Chase, Motorola, Pfizer and Old Mutual are among the companies which have either slashed or scrapped dividends in recent weeks.
G20 finance ministers and central bank governors meet to lay the groundwork for an April summit of world leaders who will try to map out next steps to tackle the global financial crisis.
If investors are left unimpressed by the April meeting, analysts say the market consequences are incalculable.
"Markets are highly impatient. They want plans to have an immediate effect, which is almost impossible. Policymakers come up with statements but you always need to see how it's implemented because they never come up with fully operational plans," van Leenders said.
DIVIDENDS SHOCK
According to Nomura, the dividend swap market for stocks -- measured by EuroStoxx 50 -- suggests that dividends will decline by 32 percent and 51 percent in 2009 and 2010 and the market implies no recovery in dividends until 2012.
The market is pricing in a peak-to-trough decline of 67 percent in dividends, a worse outcome than in the 1930s, when U.S. dividends declined by a total 55 percent from their peak in 1930 to 1933.
JP Morgan expects the dividend payout of S&P 500 companies may decline 20 percent decline and the current pace of dividend cuts is four times faster than a year ago.
Dividend cuts are affecting the number of stocks that appear attractive from a valuation point of view.
Societe Generale uses four criteria -- an earnings yield at least twice the triple-A bond yield, a dividend yield at least two-thirds of the triple-A bond yield, total debt less than two-thirds of tangible book value and a price earnings ratio of less than 16 times -- to classify stocks that are attractive according to valuation.
Currently, only two percent of U.S. large cap non-financial stocks meet those criteria, compared with 4 percent in November 2008. In Europe, six percent pass the criteria, compared with 9 percent in November.
"Despite the fact that the markets are now below the levels seen in November 2008, the number of bottom-up opportunities is actually lower. The reason for this is all too obvious, dividends have been cut," the bank said in a note to clients.
Societe Generale added however that the quality of firms passing the criteria is impressive. Microsoft, BP, Novartis, Sony are among them.
PENSION WORRIES
According to the World Federation of Exchanges, market capitalisation on global bourses has more than halved, falling to $31 trillion at the end of January from $63 trillion at the end of October 2007.
This puts enormous pressure on pension funds as companies, focusing on preserving cash to restore balance sheets, now have little extra money to spare to cover losses on portfolios and meet liabilities.
"There is major focus on the current difficult economic conditions, and the impact this is having on retirement plans," said Adrian Hartshorn, a member of the financial strategy group at investment consultant Mercer.
"There is clear evidence emerging from the 2009 reporting season that companies that adopted risk mitigation strategies in 2008 are being rewarded with better 2008 year-end funded status and lower 2009 pension expense. However, for most companies the significant equity market exposure has negatively impacted financial results."
At some point, pension funds will also have to start worrying about the future impact of inflation on their assets as a result of fiscal stimulus plans by governments around the world and quantitative easing policies reflating economies.
Joe Moody, head of liability-driven investing at State Street Global Advisors, says an environment of low inflation presents a great opportunity for pension funds to hedge their future inflation risks cheaply, by using inflation swaps.
"You have to think about what impact quantitative easing is going to have," Moody said.
He saw no rapid recovery in shell-shocked stock markets.
"The point about the equity market at the moment is it's not discounting recovery or improvement. The equity market is not buying the story and selling the fact. It's going to buy the fact when it sees it," he said. (Editing by Mike Peacock)