In the Discount Trading Room, we have built a model for preferential exposure between the various economic blocs, the United States, Europe, Japan, Japan and emerging markets.
The Discount Trading Room has been used and published since the beginning of 2018 a quarterly geographical stock model that aims to present a relative allotment between the major geographical blocks except the US. The model includes the Eurozone, emerging markets, Japan and England.
The model consists of several different dimensions: pricing, economic trend, sentiment, the position of market positions and more.
Each such dimension consists of a number of additional sub-dimensions and in fact the entire model consists of dozens of parameters whose ultimate goal is to present at the beginning of each quarter a final score for each major geographical block.
The purpose of the model is to try and identify the relative viability of the various blocks in the quarter ahead, and not to present a forecast regarding the actual rise or fall of each block of shares.
Discount notes that since January 2018, when the model was published for customers, the use of the model yielded a cumulative positive excess return (excess return) of + 28.8%.
So what’s the recommendation now?
According to the model, the recommendation now is for overweight to the eurozone and the UK in the face of a shortfall allocation to emerging markets and Japan.
Discount notes that the Eurozone enjoys the highest score in each of the model dimensions that have now been found to be significant, with the relatively strong pricing score in the Eurozone particularly noticeable, while the emerging markets (MSCI EM) receive a very low pricing score and sentiment. In Japan, the pricing picture is relatively reasonable, but the position of the positions and the sentiment in the future are a weight now on the Japanese Nikkei..
Details about some of the dimensions of the model:
In terms of pricing and visibility 3 months ahead, there is a clear priority for the eurozone
Discount, for example, indicates a number of parameters from the model and in particular the pricing element. For example, the current multiplier in the Eurozone (SXXE Index) stands at 15.4 and is relatively cheap in historical terms, since it traded at 6.8% of levels in the past decade.
On the other hand, in the EM, the multiplier is traded at a level close to the historical median (almost 49%). The eurozone also stands out with the most positive score in the momentum of changing EPS forecasts for the future, while in Japan the score is the lowest.
When comparing the current pricing premium of the stock in each block over government bonds there is a relatively high viability of Japan and then of the euro block. This conclusion is true not only at an absolute level but also in a historical comparison of the pricing premium of each market compared to the history of that premium Pricing.
Bottom line: The highest pricing score is for the eurozone, while emerging markets get the worst score, Discount emphasizes that this is not a long-term looking pricing analysis, but a parameter-based analysis aimed at helping predict the trend in the vision 3 months ahead, we emphasize that this is not a strength forecast. The increases (or the increases themselves) in each block of shares, except in the relative performance between the various blocks.
Economy dimension: Discount notes that this time the economic dimension receives zero weight in the model, ie the impact of the economic situation on the expected trend in the next 3 months is close to zero, nevertheless it is interesting to mention the consensus expectations for growth in the next two years.
In 3 out of 4 blocs, growth is expected to decline in 2023 compared to 2022, while in emerging markets there is expected to be relative stability in the growth rate in 2023 compared with 2022.