Multifactor equity forecast: Update 2022
Dr. Ivan Petzev
Financial Markets
The year 2021 was a very eventful year from an equity perspective. Supply chain problems, inflationary pressure, a wave of regulation in China and new earnings records are just a few buzzwords that can describe the movements on the financial markets.
The year 2021 was a very eventful year from an equity perspective. Supply chain problems, inflationary pressure, a wave of regulation in China and new earnings records are just a few buzzwords that can describe the movements on the financial markets.
A look at the equity performance of the following table shows that North America, with a performance of more than 30% in CHF, once again outperformed the other major markets.
Equity performance 2021
Sources: Data from MSCI, Factset
The dominance of the North American stock market in the recent past is impressive. In 7 of the last 11 years, North America has been the best performing market from a Swiss investor's perspective. However, this is reflected in the high valuations of American companies (more on this below). But the Swiss equity market also had a stellar 2021, driven by the very good performance of large-cap stocks. The performance of emerging markets, on the other hand, left much to be desired. This was mainly due to the poor performance in China.
As anticipated in the last blog, our multifactor country model had little success in forecasting in 2021 - in contrast to 2020. Our factor-based method ranks countries or regions according to their attractiveness and ventures a forecast of equity market performance over the next 12 months. For example, at the end of December 2020, emerging markets appeared attractive from a model perspective, while North America appeared less attractive. This is based on the criteria of valuation (North America high valuation, emerging markets low valuation) and earnings growth (emerging markets high growth, North America low growth).Now to the current model forecast for the year 2022, with data as of the end of December 2021:
Equity forecast 2022
Sources: Factset data, own estimates
Switzerland and the emerging markets are attractively valued, similar to a year ago. Switzerland shines mainly due to good price momentum and solid earnings and financial quality. Emerging markets represent the cheapest market, which brings them up in the rankings from a model perspective. North America continues to be unattractive. Our model judges North America to be too expensive from a valuation perspective; for financial analysts, expected earnings growth leaves much to be desired. Both factors together justify the low ranking.
So it remains exciting. We expect a more volatile year for equities and are curious to see how the country model will perform in 2022. As must be emphasized time and again, and as 2021 demonstrated: forecasts are challenging. Our model, like any other model, has substantial estimation error. Of course, the financial packaging note still applies: past performance of a financial model is no guarantee of future performance. Or as statistician George Box put it so well, "All models are wrong, but some models are useful."
