(Bloomberg) -- Emerging-market stocks in Europe, the Middle East and Africa, which rallied 72 percent in five months, have hit the “top,” Credit Suisse Group AG said, citing six “tactical” indicators. The MSCI EMEA Index’s 200-day moving average as well as the advance-decline ratio, risk appetite, cash levels, fund flows and seasonality of developing-economy stocks have “turned negative,” Alexander Redman, an analyst at Credit Suisse in London, wrote in a client note today. This typically points to a change in market direction, he said.Increased government and consumer spending in emerging economies, $1 trillion pledged by the wealthiest nations and higher growth estimates have boosted stocks in developing nations by more than 70 percent since March. Global investor appetite reached the “euphoria zone” on Aug. 4, pointing to a turnaround in the rally, according to the Credit Suisse Risk Appetite Index. The index has reversed direction after hitting “euphoria” nine times since 1984, the report showed.
“We are now calling for a tactical reversal in EMEA equities performance,” Redman wrote.
Stocks in the MSCI Emerging Markets Index were valued at 17.8 times reported earnings at the close of trading on Aug. 3, the most expensive level since Oct. 29, 2007, Bloomberg data show. Concern the rally had outpaced prospects for profit growth triggered two days of declines. The gauge of 22 developing- nations stocks rebounded 0.5 percent today.The MSCI EM index has climbed to the highest level above its 200-day moving average since January 2008, Redman wrote in the report. It’s reached a positive reading of 38.6 percent, up from a negative reading below 50 percent in January this year, he said. The positive deviation on the MSCI EMEA index has reached 35.7 percent, according to the report.
Advancing Stocks
The average six-week advance-decline ratio for MSCI EM index, which measures daily advances minus declines as a percentage of total stocks, has jumped to 16 percent from less than zero at the start of the year, Redman said. The ratio has only been higher than 16 percent for 2.7 percent of trading days this decade, indicating a fall is likely, the report said.Emerging economies probably will expand 1.5 percent this year and 4.7 percent in 2010, escaping the worst recession to hit Europe and the U.S. since World War II, the International Monetary Fund forecast July 8. Developed economies will shrink 3.8 percent in 2009 and grow 0.6 percent next year, the IMF said.The forecasts have helped trigger inflows into emerging- market equity funds for 17 of the past 19 weeks, according to Credit Suisse data. Rolling four-month inflows as a percentage of total assets is at 10 percent, one of the highest levels in the past 14 years and a “negative” indicator, the bank said.
Cash Positions Deteriorate
Stock purchases reduced the average cash position of dedicated emerging-market equity funds to a year low of 2.3 percent in July, less than the 3 percent average for the decade, Redman wrote in the report. “Typically, low cash levels - euphoria - are associated with peak equity-market index levels,” he said.The third-quarter is also typically the worst-performing three-month period of the year for developing-nation shares, Redman said. Over the past 20 years, the July to September period is the only quarter to generate an average negative return, Credit Suisse data shows.
Redman also noted emerging-market equities are trading at 13.4 times their estimated earnings, close to the November 2007 peak of 14.7 times.
“Revisions are now registering the most positive on record and are vulnerable to an inflexion,” he said.
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