AFTER a 12% rally in the MSCI World index to mid-March, developed market equities have since given back most of those gains.

While we remain constructive on the asset class on a strategic, longer-term view, we are currently underweight on a tactical, shorter-term basis.

Historically, developed market equities have created more wealth for investors, by order of magnitude, than any other liquid asset class. Looking ahead, we believe this relative outperformance by developed market equities should continue over the long-term.

Following the turmoil during the second half of 2011, developed equity markets rebounded in the first quarter of the year as the European Central Bank stepped in to help stem the debt crisis and economic data improved.

However, so far in the second quarter, equity markets have retraced their earlier gains and we are now broadly back where we began at the beginning of 2012. These recent losses are most likely – at least in part – due to renewed concerns over the euro area sovereign debt crisis, although fears over global economic growth have likely added to the sell-off.

While the outcome of the recent Greek election has lowered the risk of a near-term exit from the euro area, Greece’s long-term future in the single currency is far from secure.

On the whole, uncertainty remains over how officials plan to resolve the sovereign debt crisis. We believe this will require a strategy that promotes greater fiscal and banking union, developments whose progress will be measured in years. In the meantime, market volatility will likely remain elevated. In addition there is a chance positive steps will only be taken if markets strongly signal displeasure.

As a result of these economic and market uncertainties, Barclays tactical allocation Committee decided to move to a modest underweight position in developed market equities in their tactical asset allocation (TAA). With growing uncertainty in the near-term, the Committee believes it is prudent to reduce risk.

Our strategic asset allocation (SAA) is based on a shorter term (three to six-month) outlook and is used to regularly assess the need for tactical adjustments to our longer-term (five- year) strategic asset allocation.

From an SAA standpoint, our outlook for developed market equities has not changed: in the longer term we are positive. We continue to be impressed by the success of developed world public companies in translating modest revenue growth into strong earnings growth.

This partially reflects advances in the efficiency of corporate management, but we believe high unemployment and the resulting weakness in labour markets have also played a helping hand in keeping unit labour costs low and preserving margins.

Solid non-financial corporate balance sheets are another positive factor for developed market equities, as is the current environment.

Added to these factors is our belief that developed market equities are attractive from a valuation perspective. Current price-to-earnings ratios for all developed markets are significantly below their longer-term averages, suggesting they remain inexpensive relative to history.

:: Andrew Miller is regional office head at Barclays Wealth in Newcastle