Multifactor stock forecast: Update
Dr. Ivan Petzev
Financial Markets
A good four months ago, we reported on our country/region equity multi-factor model and its equity market forecasts. As a reminder, based on a factor-based methodology, the model ranks countries or regions.
A good four months ago, we reported on our country/region equity multi-factor model and its equity market forecasts. As a reminder, based on a factor-based methodology, the model ranks countries or regions.
In this process, the markets are evaluated on the basis of the criteria of 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 performance of the markets over the next 12 months.
A lot has happened in the financial markets since the beginning of the year. The coronavirus crisis has shaken up the markets. Of course, a factor-based model cannot predict such an event. Nevertheless, the new situation requires a reconsideration of the model predictions with more recent data. In doing so, it is worthwhile to compare the current forecast with the results before the Corona pandemic outbreak.
The following table shows our model results as of the end of December 2019:
Equity forecast for 2020
The new model results are as follows:
Equity forecast as of the end of April 2020
Four months after our first model forecast, the picture is qualitatively similar in terms of market attractiveness. Switzerland and the emerging markets are ahead. Switzerland scores very well on all factors except valuation. Furthermore, emerging markets seem interesting due to two aspects. First, analysts believe that companies from emerging markets will emerge from the current crisis with relatively low profit losses (Profit Growth Rank = 1). Secondly, emerging markets are very attractively valued at the moment (valuation rank = 2). This explains why they remain attractive according to the model. On the other hand, Europe still appears unattractive. With low price and earnings momentum and relatively poor earnings quality, continental Europe now ranks last.
Our valuation model leads to qualitatively similar predictions even after the correction. Besides Switzerland, emerging markets are interesting investment opportunities compared to other markets.
This is where the obligatory financial packaging note "All models are wrong; but some models are useful" by statistician George Box belongs. Like all models that simplify the complexity of the world, our factor model has a significant estimation error. Any model performance is only achieved in the long run.
So only the future will show which markets will be winners and which markets will be losers. We will keep you informed.
