THE FTSE 100 fell 300 points last week, wiping billions off shares, as investors grappled with growing evidence that the global economy is heading for recession.

The index of Britain’s leading shares has had its worst start to the year since it was set up in 1984, falling 9% to 5,902 – the first time it has dropped below 6,000 since the market melt-down in August.

The FTSE 250 index of medium-sized firms is already in a bear market on some measures, having slumped 21% since its peak in May, and some of Britain’s most popular stocks are down by as much as they were during the 1990s recession. Retailers, for example, have plunged 25% while the house-building sector is down 35%.

Nearly one in five fund managers polled by the investment bank Merrill Lynch for its monthly survey believes that a global recession is either “likely” or “very likely” over the next 12 months. Those who think a global recession has already started doubled from 4% to 8%.

Only 6% of professionals now back equities for the best returns over the next 12 months, against 20% the previous month.

David Schwartz, the stock-mar-ket historian who this month declared that UK shares had officially entered bear-market territory, said the average sell-off lasted a year-and-a- quarter. If it began last July, when the first heavy falls occurred, that means it could be October before the outlook starts to brighten.

Meanwhile, David Rosenberg, an economist at Merrill Lynch, said that the market could bottom in May or June if this turns out to be an average downturn, but before then there could be further heavy price falls.

However, some respected con-trarian investors think the market bottom is in sight and are selectively picking up shares.

Richard Buxton, head of UK equities at Schroders, said: “I’m buying into stocks that are collapsing – over a 12 to 18-month view that’s where the real money is to be made.”

We asked City professionals what signals they would be looking for to indicate it was time to start buying again.

Follow company bosses

Khuram Chaudhry, an analyst at Merrill Lynch, thinks the ratio of directors buying to selling is one of the best indicators. Bosses know when their shares have been unfairly marked down and a jump in the ratio has a good record of preempting rallies.

During the past couple of weeks this has started to happen. There have been 11 buys for every sell as executives such as Sir Stuart Rose at Marks & Spencer have taken the opportunity to snap up shares in their own firms. This is up from six buys to one sell in December and just two buys to one sell in the January-to-June period last year.

Chaudhry said: “If directors start buying in the most badly hit sectors and there are clear signs that profit expectations start to trough, that would be a more compelling sign that the outlook is improving.”

You can track directors’ deals at digitallook.com.

Buy when others sell

A trough is often preceded by a rush out of shares, and some commentators believe the signal has already begun to flash green. David Edwards of Heron Capital Management points to the latest survey by the American Association of Individual Investors.

In a note he said that “59% are bearish over the next six months, and only 20% bullish – the largest gap in 17 years. There have been only three other occasions when bears exceeded bulls by more than 30% and on these occasions stocks rose 14%, 35% and 24% respectively over the next 12 months”.

In Britain, record numbers cashed in their stock-market investments in November, pulling £333m more out of unit trusts than they put in – the first negative month since 1992, according to the Investment Management Association.

At the same time, arch-contrar-ian Anthony Bolton, who has one of the best track records, said he had started buying bombed-out property stocks.

You can find data on sales of investment funds to individual investors at ima.org.

Keep an eye on firms’ debt

John Haynes at the private-client manager Rensburg Sheppards suggests investors track the income yield on corporate bonds – debt issued by companies when they want to raise money.

The gap between the yield paid by corporate bonds and UK gilts or American Treasuries widens when investors are worried about the state of the market and economic growth, and narrows when things are looking up.

In June last year, before the credit turmoil struck, 10-year Treasuries were yielding 5% and high-yield corporate bonds 8% – a spread of 3%. Now the spread has widened to nearly 7% with Treasuries at under 4% and high-yield corporate bonds at more than 10%.

Haynes said: “As investor sentiment starts to improve, credit spreads will start to narrow.”

You can monitor bond yields at financial websites such as bloomberg.com.

Wait for Americans to buy houses again

Experts say investors should watch for when the inventory of American unsold homes starts to fall significantly. The latest figures from the National Association of Realtors (NAR) show that there are 4.27m unsold homes – up 21% on this time last year.

Lawrence Yun, NAR chief economist, said: “Further reductions in prices may be required in some areas to induce buyers back into the market.”

For data about the inventory of unsold homes go to realtor.org.

Monitor takeover targets

Analysts believe the first signs of takeover activity in the battered financials sector could be a sign that the worst is over. Takeovers in the sector will be a sign of fresh confidence in the underlying businesses.

Unearth cheap shares

One strategy for picking cheap stocks would have resulted in profits of 37% over the past 12 months, trouncing the market, down 5%, many times over.

It seeks to identify bargain shares that are growing fast and have a good dividend yield – dividend income as a proportion of the price.

It highlights stocks yielding 3.5% or more that are growing quickly according to the price/ earnings growth or Peg ratio.

It identifies firms with a Peg below 0.75. This is usually a good sign because it shows the firm’s growth is not overrated by the market.

Of the stocks thrown up by the strategy, David Shapiro at Collins Stewart Fund Management recommends investing in pubs firm JD Wetherspoon, bookmaker William Hill, car firm Inch-cape and the global recruitment firm Hays.

Graham Neale at Killik, a stockbroker, likes Barclays, as he believes it has been oversold, and Mark Durling at Brewin Dolphin also believes the time is right to start buying into banks. He prefers HBOS and Royal Bank of Scotland.

Brewin also recommends the insurance giant Aviva, while Richard Buxton at Schroders said he had been buying shares in the retailers Marks & Spencer and Next.

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