The PARSUMO Contrarian Indicator Equity (PCE) is currently showing an equity ratio of just over 45%, which indicates lower equity index returns over the next 12 months. After reaching record highs in March 2015, equity ratios have fallen slightly for the fourth successive quarter. Many investment strategists remain heavily invested in equities, which continue to point to a fragile stock market environment.
The quarterly published NZZ Anlagepanorama, which offers an overview of the equity ratios recommended by banks and asset managers, fell by one percentage point in the first quarter of 2016 in comparison to the previous quarter. The average recommended equity ratio for a mixed portfolio is 45.3%, above the historical average and indicative of the current preference for equities, which appear the most attractive alternative in today’s low interest rate environment.
Our analysis of the historical data shows, however, that a recommended equity ratio of more than 45% will in all probability lead to lower equity index returns over the subsequent 12 months. This is the result of investor behavior, which can be explained by findings from the field of behavioral finance (herd behavior, hyperbole and understatement, etc.).
The PARSUMO Contrarian Indicator Equity will continue to advocate an underweighting in equities as long as the equity ratio points to an expected negative index return over the next 12 months. The current forecast for the MSCI World is –2.4%.
For more information and methodology of the PCE click here (article in German only)
Jacques Stauffer, CEO, and Hans Peter Stücheli, Senior Portfolio Manager
Förrlibuckstrasse 30, CH-8005 Zurich
Tel. +41 43 288 29 00