Multifactor stock market forecast 2021
Dr. Ivan Petzev
Financial Markets
In early 2020, we first reported on our equity multi-factor model for countries/regions and its equity market forecasts. The factor-based method ranks countries or regions according to their attractiveness. The criteria used are price-momentum, valuation, earnings-growth and quality.
In early 2020, we first reported on our equity multi-factor model for countries/regions and its equity market forecasts. 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.
One year after the initial forecast, we can evaluate the model performance in retrospect, so-called "out-of-sample". Last year, the model performed well. Namely, the average annual return in CHF of the three regions that were attractive from a model perspective (emerging markets, Switzerland, North America) was 7.1%, while the three regions that were unattractive from a model perspective (Japan, Europe ex UK, UK) averaged -3.8%. Our model was able to generate clear added value. This was the case in a year in which systematic approaches (so-called quantitative models) sometimes encountered great difficulties.
At this point, we would like to point out that the past performance of a model is no guarantee for future performance. Like any model, our country model has a significant estimation error.
Based on data from the end of 2020, we are of course interested in looking at the model forecast for 2021 in the near future:
Equity market forecast 2021
The qualitative picture is similar to last year. Switzerland and the emerging markets are ahead. The emerging markets score above average on all factors. Therefore, this is the most attractive market from a factor perspective. Switzerland performs similarly well, losing out to emerging markets in the rankings due to slightly weaker price momentum and earnings growth numbers (momentum in analyst estimates). Japan and Continental Europe together form the golden mean and achieve the same attractiveness ranking. The UK and North America are unattractive from today's model perspective. One reason for this is the high valuations of these markets.
The Corona pandemic, decisions by central banks and federal financial authorities will continue to occupy the markets in 2021. It therefore remains exciting which regions/countries will ultimately be among the winners and which regions/countries will be among the losers.
We will keep you posted.
