Developed Equities Overbought

Since the publication of our 2013 outlook on January 7, the MSCI World has rallied by 3.7%, the MSCI EAFE by 4.1%, the Dow Industrials by 4.7%, and the S&P 500 by 3.5%. Our constructive outlook on developed equities relative to emerging markets equities was prescient, as Emerging Markets remained flat during the period. Meanwhile, Frontier Markets rallied by 5.0%. Based on our technical and sentiment indicators, both developed and U.S. equities are now overbought. For example, last week’s survey of 40 NAAIM (National Association of Active Investment Managers) member firms shows an equity exposure of 104.25%, the highest level since early 2007!  This survey (courtesy Decisionpoint.com) contains data from leveraged and long-short strategies, and thus responses can vary widely. The results are then averaged every week. Inception of this poll is 2006. The latest result shows active money managers to hold a net leveraged long position, which has only occurred the second time since inception of this poll. From a contrarian standpoint, U.S. (and developed equities) are now highly overbought.

NAAIM

We are still constructive on developed equities, given ongoing central bank easing (the BOJ has vowed to adopt a more aggressive easing policy by actively underwriting more government spending), decent valuations, and the elimination of certain tail risks as discussed in the inaugural issue of our monthly newsletter (please email us for a sample). However, we cannot ignore the market’s overbought conditions. As such, we are revising our 12-month outlook on developed equities. Our 12-month return outlook for developed equities is revised down from a rating of 7 to 5, while our risk rating is revised from 6 to 7. Our outlook on developed equities is now on par with that for EM equities Our ratings for other major asset classes remain the same, although we are keeping a close eye on U.S. Treasuries, gold, and WTI crude oil.

12-month outlook February

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