Multifactor Equity Forecast: Update September 2021
Dr. Ivan Petzev
Financial Markets
A lot has happened on the financial markets in recent weeks and months. Emerging markets in particular have been characterized by high volatility. Therefore, it is worth taking another look at our country/region equity multi-factor model and its forecasts.
A lot has happened on the financial markets in recent weeks and months. Emerging markets in particular have been characterized by high volatility. Therefore, it is worth taking another look at our country/region equity multi-factor model and its forecasts.
As a reminder, the factor-based method ranks countries or regions according to their attractiveness. The criteria used are price momentum, valuation, earnings growth and quality. The sum of these ratings determines the ranking order. The model thus allows a forecast of the expected relative return of the markets over the next 12 months.
Recall the model forecasts as of the end of December 2020:
Multifactor equity forecast end 2020
While the model was able to demonstrate very good predictive power last year (2020), 2021 is proving challenging from a model perspective, at least up to the time of this blog. Emerging markets in particular failed to live up to model expectations. The performance of emerging markets from the beginning of the year to the end of August was 5.9% in CHF. In contrast, the Swiss and North American markets gained 18.9% and 27.5% (in CHF) respectively during the same period.
Now to the current model forecast as of the end of August 2021:
Stock Forecast August 2021
Emerging markets remain attractive from a model perspective despite a slump in price momentum and earnings growth. Europe could move up in the rankings due to the improved momentum in analysts' estimates and the strong market performance in recent months. The most prominent model downgrade we can observe is for Switzerland. The Swiss equity market underperforms in terms of earnings growth and momentum and is unattractive from a relative valuation perspective.
Whether the model expectations will be fulfilled remains to be seen. For this to happen, the emerging markets in particular would have to catch up significantly in the coming months.
Finally, the usual (financial product) packaging note that the past performance of the model is no guarantee of future performance. Like any model, our country model has a non-negligible estimation error.
