Picking winning stocks for 2001 is difficult with the factors influencing stock markets set to change again this year. In its annual forecast, Merrill Lynch, cautions that global economic growth is slowing and will affect company earnings. Against this background it is advocating a defensive strategy for investors advising them to focus on specific sectors and countries for best results.

Much will depend on the performance of the US economy. Critically, stock markets will be cautious about the outlook for US inflation and policy decisions from the Federal Reserve. In the short-term, Merrill Lynch believes a lot of the bad news has already been priced into the markets. It stresses though that any sustained pick-up in equity markets will require lower interest rates.

Its chief economist, Mr Bruce Steinberg, expects the Federal Reserve could begin to cut rates in the spring which could prepare the way for a broad-based stock market recovery in the second half of 2001.

Its analysts suggest investors should focus on stocks in the pharmaceutical, aerospace and defence utilities, food, real estate and tobacco this year which will become more attractive now that technology stocks have lost their shine.