JPM: Equity rally “overdone”

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Via JPM:

SMid-Caps (and equities in general) have gone straight up since the start of Nov(the MSCI Europe Small Cap is up 17% since then… the MSCI ACWI small capindex up 19%). Should we expect a bit of a pullback?Most SMid-Cap indices inthe world are up YTD, with many up double digits in a year in which real GDP inthe world is set to contract by 4.0% no less. The AAII Bulls vs Bears index is alsositting high within its historical range, as are the RSIs ofmost SMid indices… allsigns of very anemic gains, if any, in the coming months. Furthermore, every timethat global market cap has surpassed global GDP, the market has corrected… andthis ratio is today not just above 100% but at its all-time high. While we believe2021 will benefit from clear tailwinds, we wouldn’t be surprised if SMid-Caps took abreather in the coming weeks. In fact, the recovery trade that we had witnessedsince the start of Nov broke down a bit last week, with investors moving backintosome of what had worked earlier in the year. However, we prefer to stick to ourvalue approach, looking for stocks that are still down big, with undemandingvaluations, solid balance sheets, and businesses that are not structurallydamaged, as we believe they represent the last big alpha/upside opportunities leftin the market at this juncture. A few such names from our SMid Strategy modelportfolio are: Acerinox, Andritz, Applus, Arrow Global, ASTM, Bellway, DCC,FLSmidth, Maisons du Monde, Motor Oil, Talgo, and Taylor Wimpey… along withsome more defensive plays (LDC and Vectura).

That pretty much accords with my own thinking at this juncture.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.