Despite the near-term risks, that equities should outperform government bonds over the balance of 2008, predicts BCA Research.

“Given the lack of coordinated central bank easing and mistrust of the banking system, stocks are likely to remain choppy in the coming weeks and put in an extended bottom. However, we have highlighted that downside from here should be limited,” the independent equities research firm says in a note.

BCA says that economic pessimism has reached an extreme, leaving equities oversold and attractively valued. In contrast, the flight to safety has left government bonds overbought and overvalued, it maintains.

“While the risk/reward outlook justifies maintaining a neutral allocation, odds favor that the next move in yields is up. Netting out our biases, leaves us favoring equities over bonds on a six-12 month horizon,” BCA concludes. “Similarly, we have noted that economic pessimism is hitting an extreme and reflation is becoming fully discounted. This combination is typically supportive of stocks over bonds.”