Financial market problems may dent global economic growth, but emerging countries should continue to expand — that is according to the latest report by Bermuda Investment Advisory Services (BIAS).

BIAS' Quarterly Review & Outlook, dated December 31, 2007, revealed that US sub-prime mortgage woes will hamper the economy's growth, particularly in the developed world, while the US trade deficit should narrow on rising exports as the dollar trades near an all-time low.

The picture is not much better for Europe, with economic growth expected to decline as a result of a strong euro and high oil prices, the study said.

Meanwhile, on the home front, the research highlighted the dwindling value of XL Capital's stock, Butterfield Bank's successful acquisition of health management group Bentley Reid, a big rise in profits for KeyTech and a dispute between Consolidated Water Co. and the British Virgin Islands government over ownership rights to a salt water treatment plant on Tortola as some of the main of developments on the Island last year.

The report showed that, despite a brief rally at the end of November 2007, in which XL shares advanced the most in six years following analyst comments that fears over the solvency of one of the company's subsidiaries were exaggerated, ratings agency Moody's announced that it was reviewing the company's credit rating based on concerns about the financial strength of XL's insurance units. The news drove the stock down by 6.7 percent on the same day, making XL the third-worst performing stock in the Standard & Poor's 500 last year.

On a more positive note, though, BIAS reported that Butterfield Bank repurchased a further 21,021 of its shares in November 2007, allied to the takeover of Bentley Reid, which provides investment advisory services from its offices in London and Hong Kong and has almost half a billion dollars under discretionary management.

In addition to this, KeyTech's interim earnings results for the six months ended September 30, 2007, showed a 56 percent increase in consolidated net income compared to the same period the previous year, with subsidiaries M3 Wireless and WesTel boosting these figures with revenue growth of 20 percent and 40 percent respectively.

Elsewhere, Consolidated Water stocks fell 24 percent in value after news emerged about a dispute with the British Virgin Islands government over ownership rights to a salt water treatment plant on Tortola, with analysts believing the dispute could lower the company's 2008 earnings by approximately one-third.

In terms of the outlook for the first quarter of this year, near term quality was the most important factor for bonds, while value was predicted to come out of those sectors which had suffered over the past year, such as financials, with opportunities emerging to add significant yield pick-up on cheap valuations.

But, credit spreads are likely to widen further as sub-prime related losses continue to mount, according to the BIAS study.

In the American markets, the dollar is expected to rebound from trade weighted lows as US exports start to gain traction and sterling may indeed depreciate instead based on economic worries as financial and real estate markets continue to feel the brunt of sub-prime problems.

Similarly, the European Central Bank liquidity injections may have the effect of stalling the appreciation of the Euro, but the Japanese yen should rise as the carry trade (a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to buy a different currency yielding a higher interest rate) unravels in the face of lower investor risk appetite, the report added.

In the commodity sector, prices are expected to climb and provide a viable alternative to bonds and equities, with agricultural commodities set to perform best underpinned by strong demand and minimal supply increases.

The findings concluded that weak earnings could derail broad market performance, but sector and security selection should enhance returns, as defensive sectors such as utilities appeared the most attractive to investors, and companies involved in the preparation and distribution of water also offering excellent opportunities for investment.