Citi’s World Radar Screen Zeros In On Japan, Energy, Utilities

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The World Radar Screen (WRS) model developed by Citigroup Inc (NYSE:C)’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.

World Radar Screen model’s variables

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.

World Radar Screen shows appreciation in capital goods

On a global basis, Citi analysts see potential for appreciation in capital goods, healthcare and equipment services, banks, diversified financials, insurance, and automobile and components. Other sectors that are more undervalued include utilities, materials, energy, and technology.

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On a broader basis, global financials, energy, utilities, and materials names present the best value globally, according to Citi Analysts.

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World Radar Screen: Japan remains attractive

In Citi’s (NYSE:C) view, Japan remains ranked as attractive, without changes relative to October while Emerging markets and the UK are inexpensive but present concerns regarding their growth potential. Japan has returned 24.85% year to date in USD as of December 9, 2013 outpacing the MSCI World and MSCI Europe. Emerging markets have underperformed their developed counterparts driven by fears of rising interest rates and risk aversion by investors.  The UK’s recovery is still slower relative to other parts of the world and local stocks have underperformed their European and U.S. counterparts.