World radar screen performance unimpressive last month

The World Radar Screen (WRS) model developed by Citi’s quantitative research team led by Chris Montagu is a globally consistent framework to select stocks that are undervalued relative to their fundamentals and that exhibit price and analyst estimate momentum.

The relative value part of the model has a Price/Earnings (P/E) model that has three variables: expected earnings growth, market capitalization, and country dummies (variable to account for differences in accounting standards and corporate ownership rules). When there is not enough data to use the P/E model, then Citi analysts use the Price/Book (P/B) framework that replaces expected earnings growth with expected return on equity. The other two variables remain the same.

Relative value is determined by comparing the stock’s actual P/E (or P/B) to its theoretical value. Currently, for the MSCI World Universe covered in this model, 95% of stocks have enough data to use the P/E model, a remaining 4% use the P/B model, and 1% do not have enough data to calculate a relative value score.

For the month ending on February 4, 2014, the top decile underperformed the bottom decile by 2.44% for the MSCI World universe. Such performance was expected as investors continued to be concerned over emerging markets’ outlook. Surprisingly, the decile spread was 6.18% and 1.39% for the UK and emerging markets, respectively, showing outperformance relative to the overall model. Year to date, the MSCI World top decile lost 3.9% against a market return of -3.7%. The WRS provided some downside protection for MSCI emerging markets as the top decile was down 5.84%against a market loss of 6.6%.

 World Radar Screen

composite rank World Radar Screen

Financials remain attractive

Citi analysts continue to believe financials are attractive globally. Composite WRS scores have improved relative to 3 month average for the sector. Technology and industrials also have better composite scores this month relative to their 3 month averages. Meanwhile, energy, materials and utilities are attractively priced and classified as contrarian.

relative value momentum map for MSCI World Radar Screen

Source: Citi Research

current sector composite scores vs 3 months avg

Overweight Japan while Asia Pacific ex Japan is unattractive

The WRS model indicates that Japan continues to be attractive on both a value and momentum basis. Japan, emerging markets, the UK, and MSCI EAFE are inexpensive relative to their fundamentals. However, the last 3 markets are classified as contrarian because their price and earnings momentum remains low. Asia Pacific ex Japan’s momentum declined relative to last month and the market moved from glamour to unattractive.

relative value momentum map World Radar Screen

current-sector-composite-scores-vs-3-months-avg-WSR

Source: Citi Research