Objective stock market forecast
Dr. Ivan Petzev
Financial Markets
Which regions or markets will generate the highest returns in 2020?
Which regions or markets will generate the highest returns in 2020?
Equity markets 2020: Multifactor equity forecast
Galaxy
Traditionally, experts announce their expectations / estimates at the beginning of the year. Forecasts are often derived from a narrative about the state of the economy, central bank and fiscal policy, and geopolitical risks. An objectified approach is desirable as an alternative to these common market outlooks, which are often based on subjective assessments.
An objectified forecast can be derived from factor-based equity models. Purely data-based models have the advantage of being free of all-too-human emotions such as fearfulness and euphoria, or more nobly, free of subjective assessments. Moreover, the approach has the advantage of inter-subjective verifiability because it is based on established research findings.
For example, Assness, Moskowitz, and Pedersen (2013) showed that factors such as "value" or "momentum" are not only found in the returns of individual stocks, but also in the returns of indices. Based on the results in the research literature and our own research, we have developed the Swiss Rock country/region equity multi-factor model. It ranks the countries or regions. The markets are evaluated with the criteria price-momentum, valuation, earnings-growth and quality. The sum of these ratings determines the overall attractiveness, expressed as a podium position, analogous to sports.
We have tested our multi-factor model at both regional and country level. Since 2002, for example, the two regions with the highest model rating achieved a statistically significant 4.7% higher average annual return than the two regions with the lowest rating (t-value: 2.01). Such a difference is economically significant; to be fair, the test period for meaningful statistical tests is rather short.
Nevertheless, our model seems to have explanatory power: Markets with higher attractiveness scores also have higher average annual returns.
The following table shows our model results for the year 2020.
Podestplätze der Aktienmärkte:
Equity ranking 2020
Emerging market equities have the highest attractiveness and thus the best expected returns, followed by Switzerland and North America. The high ranking of North America and Switzerland is explained by the high "price momentum" as well as the high "earnings quality" of these markets. For emerging markets, the attractive "valuation" and high "earnings growth" are key to the top ranking.
Our empirically substantiated multifactor model is relatively simple and provides significant explanatory power for forecasting regions' stock returns. In addition to the return forecast, an objectified presentation of possible future developments naturally includes the indication that the estimation error (range of uncertainty) is significant.
We will find out which stock market will come out on top in this race in just under a year's time.
