Stock market strategists say equities will rise next year but their optimism is muted by worries about the U.S. campaign against Iraq, according to a Reuters poll.

The poll of 90 strategists in North America, Europe and Asia showed that after three years of diminishing returns, 2003 will bring stock market gains of around 14 percent in the United States and around 25 percent in some Asian markets.

Strategists say that bouts of investor despair this year have left share prices looking cheap, and that cost-cutting and mergers among struggling financial, technology and telecoms companies will boost profits for the corporate survivors.

They are also banking on low official interest rates to nurture recovery in the frail world economy.

But for all stock markets, much depends on whether the United States gets drawn into a lengthy war in Iraq.

"I'm modestly optimistic for next year," said Donald Coxe at Harris Investment Management in New York. "But war with Iraq...is a big unknown. The feeling that the war will be over in four, five days is wrong — it'll be an ugly war."

This week's survey showed the world's benchmark stock index, the Standard & Poors 500, rallying back over 1,000 from current levels around 900.

Re-Election Boost

That would still be way down on the 1,527 it hit at the height of the technology boom in 2000 — and a long way off 1,350, which is where the strategists forecast the S&P 500 would end 2002 when they were polled this time last year.

U.S. strategists are pinning their hopes partly on plans by President Bush to offer a big package of tax cuts before his 2004 re-election campaign.  

The magnitude of share price gains depends heavily on whether the world's banks and insurers can make more money after a year of tumbling stock prices, corporate accounting scandals and burgeoning bad debts.

Insurers have been hard hit by the falling value of their stock market investments.

Banks everywhere lost lucrative business in mergers, acquisitions and share offerings as investors lost faith in profit forecasts and shares ceased to be acceptable tender in big corporate deals.

In Japan, such business had long since dried up. For the Nikkei to rally, banks there will have to show they are finally tackling bad debts estimated at around $400 billion, accumulated in an asset-price bubble that burst a decade ago.

German banks are deemed ripe for a flurry of branch closures and mergers. "In Germany there are more bank branches than bakeries," said Ralf Zimmermann at Sal Oppenheim in Frankfurt.

"In each sector where we hear news about consolidation, it should be positive since it puts a check on these declining earnings and (profit) margins."

At Last ... New Computers?

Across the world, technology and telecoms companies still need to cut operations that expanded too far and too fast in the late 1990s, strategists say.

But in Taiwan, whose economy is driven by exports of personal computers and microchips, investors are praying that companies will have to start replacing the PCs they bought in 1999 to fix the Y2K bug.

A new round of investment in technology would help to buoy the world economy, but there are risks.

Above all, there are the fears about Iraq. Another Reuters survey this week found 10 out 18 defense experts thought war was likely or very likely and six gave a 50:50 chance that U.S. troops would go into Iraq, probably in January or February.

Most analysts thought conflict would last between two weeks and three months, but the United States would keep troops in Iraq long after this.

"The United States will win...then they sit down and rule the region from there, and that's costly," said equity strategist Giuseppe Amato at Lang & Schwarz in Duesseldorf.

Then there's the booming housing market that's helped to keep consumers spending in countries including the United States, Britain and Australia. Pessimists say this could turn out to be another asset price bubble waiting to burst.

"We've had a significant run here this quarter," said Conor Bill, a partner at Lawrence & Co. in Toronto. "The year will finish strongly. But I suspect we will have a down year as reality sets back in to this marketplace."