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1、,7.0%,3.0%,2.0%,1.0%,0.0%,26 October 2012,Equity StrategyGlobal,abc,Global ResearchEquity InsightsWhen analysts agree Earnings momentum can be a powerful indicator of short-termperformance,but the relationship weakens when there isincreasing disagreement among analysts We show how screening for low
2、earnings dispersion canimprove the basic momentum signal Our analysis suggests Media and Insurance could outperformfrom a global perspective,while Capital Goods and Autos aremost at riskEarnings momentum strategies have a good track record in predicting short-term performancebut,like any simple stra
3、tegy,they work more effectively at some times than others.What weneed is a signal to tell us when earnings momentum is likely to be most powerful in predictingreturns.We believe earnings dispersion can help in this respect.Widening dispersionindicates increased disagreement among analysts and can be
4、 an early warning signal thatestablished trends in earnings momentum are about to break down.Globally,a strategy which buys the industry groups with the highest earnings revisions and,Daniel Grosvenor*Equity StrategistHSBC Bank plc+44 20 7991 Garry Evans*Global Head of Equity StrategyThe Hongkong an
5、d Shanghai BankingCorporation Limited(HK)+852 2996.hkView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulations,sells those with the lowest has outperformed by 3%annually over the past 15 years.A strategywh
6、ich also screens for low earnings dispersion has outperformed by 6%annually over thesame period.Regionally,this strategy has produced the highest returns in the EmergingMarkets(8%)and in Europe(7%).It has worked less well in the US,but has stilloutperformed by 2%annually since 1997(chart 1).Currentl
7、y,Media and Insurance are well placed from a global perspective with relatively highearnings momentum and very low dispersion.In contrast,Capital Goods and Autos scorebadly,which suggests they are at risk of underperformance in the short term.In Europe,Insurance also ranks highly,together with Consu
8、mer Durables and Food&Beverages.Capital Goods and Semiconductors are the worst placed.1.Annual returns of basic and enhanced momentum strategies(Dec 1996-Oct 2012)8.0%,Issuer of report:,HSBC Bank plc,Disclaimer&DisclosuresThis report must be readwith the disclosures andthe analyst certifications in,
9、6.0%5.0%4.0%,the Disclosure appendix,and with the Disclaimer,which forms part of it,GlobalMomentumSource:HSBC,Thomson Reuters Datastream,IBES,MSCI,US,EuropeMomentum&dispersion,GEMS,Equity StrategyGlobal26 October 2012When analysts agreeEarnings momentum can be a powerful indicator ofshort-term perfo
10、rmance.For example,industrygroups with the highest earnings revisions ratioshave outperformed those with the lowest by 3%annually over the past 15 years(chart 2).In this report,we show how this simple strategy canbe enhanced by taking into account the dispersion ofanalysts earnings forecasts.Specifi
11、cally,we findthat the signal from earnings momentum is strongerfor industries where earnings dispersion is low astrategy which also screens for low dispersion hasreturned 6%annually over the same period(chart 2).Intuitively,this relationship stems from the fact thatearnings dispersion measures the s
12、trength ofagreement(or disagreement)across analysts.Whendispersion is low the signal from earnings revisionscan be seen to be more credible because it showsthat there is a strong consensus across analysts.Incontrast,high dispersion reflects more uncertaintyover the earnings outlook and suggests that
13、 themomentum signal is about to break down and shouldbe treated with caution.,Incorporating dispersionIn refining our simple earnings momentum strategywe draw on the work of Andreas Dische,who firstidentified the relationship at the stock level in his2001 paper Dispersion in analyst forecasts and th
14、eprofitability of earnings momentum strategies.We screen the industry groups in two stages.First,we rank them by their earnings momentum asmeasured by the ratio of upward revisions to totalrevisions over the previous three months.We sortthe industry groups into three groups of eight basedon the magn
15、itude of this ratio(high,mid and lowmomentum).Second,we rank each group of eightby their earnings dispersion and sub-divide each intotwo groups of four(high and low dispersion).Earnings dispersion is measured by the averagestandard deviation of analysts 12-month forwardEPS forecasts.We standardise t
16、his across industries by dividing bythe mean forecast(to give the coefficient ofvariation),and comparing this measure to itshistorical average(in the form of a z-score).This accounts for the fact that some sectors have,abc,structurally higher dispersion in forecasts.2.Global:Performance of basic and
17、 enhanced momentum strategies300250200150100500,Dec-96,Dec-98,Dec-00,Dec-02,Dec-04,Dec-06,Dec-08,Dec-10,Momentum+Dispersion,Momentum only,Source:HSBC,Thomson Reuters Datastream,IBES,MSCI.NB:Momentum strategy buys industry groups with the highest revisions ratio(upward revisions as%of total)and sells
18、 thosewith the lowest.Momentum&dispersion strategy also screens high/low momentum industry groups for low forecast dispersion2,Equity StrategyGlobal26 October 2012This produces the six groups shown in the tablebelow.We find that industries that fall into group 1tend to have the strongest short-term
19、performance,and group 6 the weakest.This points to a strategywhich gives more weight to the signal from earningsmomentum when dispersion is low.3.Combined momentum and dispersion strategies,0.06%.Furthermore,the relationship seems to holdover a longer time period group 1 industriesremained the best
20、performers over six months,andgroup 6 the worst over three months.It should be noted that this strategy has notperformed consistently over the past 15 years.Indeed,as can be seen in chart 2 on the previous,abc,Momentum,Dispersion,page,at the global level,both the simple,Group 1Group 2Group 3Group 4G
21、roup 5Group 6Source:HSBC,HighHighMidMidLowLow,LowHighLowHighHighLow,momentum strategy and the enhanced strategyunderperformed significantly from late-2002 tomid-2004.We believe this is due to thesignificant adjustment in expectations followingthe tech-bubble,which reduced the predictive,power of the
22、 earnings revisions.During this,ResultsTo back-test this relationship we formed thesegroups each month and compared their average(equal-weighted)performance over the following 1-6 months.We show the results for global industrygroups in table 4 below,and full results for the otherregions can be found
23、 in the appendix.These results are very encouraging they clearlyshow that low dispersion industries are the keydriver of the overall earnings momentum strategy.Within the low momentum industries those with lowdispersion underperformed by-0.22%,whilst thosewith high dispersion only underperformed by-
24、0.12%.For the industries with high momentum therelationship is even clearer those with lowdispersion outperformed by 0.24%,whereas thosewith high dispersion actually underperformed by4.Average 1-6 month relative performance from 1997-2012(%),period the equity market recovered and cyclicalsrebounded,
25、but earnings revisions for cyclicalsectors remained relatively weak.The performance of our enhanced strategy alsovaries significantly across regions.Chart 5 belowshows the cumulative relative performance in theUS,Europe and Emerging Markets.The strategyhas worked best in the Emerging Markets where i
26、thas returned 8%annually over the past 15 years,followed by Europe where it has returned 7%perannually.Performance has been far weaker in theUS,although the strategy has still returned 2%annually over the period.,1 Month,3 Month,6 Month,High MomentumGroup 1Group 2Mid MomentumGroup 3Group 4Low Moment
27、umGroup 5Group 6,Combined-Low dispersion-High dispersionCombined-Low dispersion-High dispersionCombined-High dispersion-Low dispersion,0.090.24-0.060.080.21-0.04-0.17-0.12-0.22,0.180.57-0.220.130.030.23-0.29-0.05-0.53,0.541.39-0.300.14-0.080.36-0.55-0.77-0.33,Source:HSBC,Thomson Reuters Datastream,I
28、BES,MSCINB:performance relative to equal weighted industry group performance3,420,380,220,-5,-4,140,120,100,80,1,Equity StrategyGlobal26 October 20125.Regional performance of enhanced momentum strategies340300,disagreement across analysts.This would havesent a more cautious signal under the enhanced
29、strategy(specifically,the industry slipped intogroup 2 in April 2008).,abc,2606.Global Materials:Momentum&Dispersion,18014010060,105,642,96,98Europe,00,02,04 06GEMS,08,10,US,0,0-2,Source:HSBC,Thomson Reuters Datastream,IBES,MSCI,Momen tum strong,but dispersion rising,We can only speculate as to the
30、reasons for this,Jan-08,Apr-08,Jul-08,Oct-08,Jan-09,variation in performance,but it could reflect theavailability of information in each of the regions.Inthe US,the level of guidance is far higher,preannouncements are more frequent,and all listedcompanies are required to produce quarterly reports.Th
31、is means that information on earnings diffusesmore quickly across investors and so weakens thesignal from momentum.Indeed,at the stock level,evidence has shown that returns from earningsmomentum strategies are less pronounced for large,Relativ e rev isions ratioDispersion z-score(RHS)Source:HSBC,Tho
32、mson Reuters Datastream,IBES,MSCI7.Global Materials:Relative return,companies and those with high analyst coverage 1.These companies have more transparent informationthan their smaller,less covered counterparts.,60,Jan-08,Apr-08,Jul-08,Oct-08,Jan-09,Relativ e return,An example Materials in 2008It is
33、 informative to illustrate the significance ofdispersion with a specific example.In chart 6below,we show the relative revision ratio andearnings dispersion of the global Materialsindustry around the financial crisis,and in chart 7we show its relative performance.The industrybegan to underperform sig
34、nificantly in June 2008,but its earnings revisions remained strong untilOctober,which would have sent a buy signalunder the basic momentum strategy.However,atthe same time earnings dispersion was increasingrapidly there was significantly moreSee Hong H,Lim T and Stein,C,2000,Bad new travelsslowly:si
35、ze,analyst coverage and the profitability ofmomentum strategies,Journal of Finance 554,Source:HSBC,Thomson Reuters Datastream,IBES,MSCI,Equity StrategyGlobal26 October 2012The current pictureSo we have shown how earnings dispersion can beused to improve an earning momentum strategy,butwhat does this
36、 analysis suggest currently?In the tables on the following pages we groupindustry groups in each region based on their currentearnings revisions and dispersion.We highlight thekey conclusions below.GlobalGlobally,this analysis suggests Media,Insuranceand Real Estate are well placed to outperform ast
37、hey have relatively high earnings momentum andlow dispersion.Consumer Durables also scores wellfor earnings momentum and features in group 1,butwhile its dispersion score is low relative to the otherhigh momentum industries,it isnt low from a widerperspective(ranking 10th overall).,is relatively hig
38、h.This means the signal isnt asstrong so it falls into group 2.Autos looks to be most at risk.It has the lowestmomentum rank with a revisions ratio of just 19%,and its dispersion score is also very low suggestingthat there is agreement across analysts.EuropeGroup 1 contains Consumer Durables,Food&Be
39、verage,Pharmaceuticals and Insurance.Interestingly,Household Products and Softwareand Services,the industry groups with the highestmomentum,both have high dispersion in earningsforecasts.This suggests that the consensus isweakening and the momentum signal should betreated with caution.Both fall into
40、 group 2 on ourenhanced analysis.9.European Household Products:Momentum is strong,butdispersion is rising,abc,At the other end of the scale,Capital Goods,Autosand Transportation have low momentum and lowdispersion,suggesting they are at risk ofunderperformance.8.Global Autos:Momentum is weak and ana
41、lysts are inagreement,403020100-10,210-1-2,302010,10-1,-20Jan-10,Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Relativ e rev isions ratioDispersion z-score(RHS),-3,Source:HSBC,Thomson Reuters Datastream,IBES,MSCI,0,-2,-10,-3,At the other end of the table,Capital Goods looks,Jan-10,Jul-10 Jan-11,Jul-11,Jan-12,Ju
42、l-12,worst placed.It has the 6th lowest earnings,Relativ e rev isions ratio,momentum and the 4th lowest dispersion.,Dispersion z-score(RHS)GEMSSource:HSBC,Thomson Reuters Datastream,IBES,MSCIHousehold Products and Real Estate score well in,USIn the US,group 1 features Consumer Durables,Food Retail,B
43、anks and Insurance.Of these Banks isparticularly well placed it has the second highestearnings momentum and there is a strong consensusacross analysts.In contrast,Telecoms has the 5thhighest momentum overall,but its dispersion score,the emerging market region.At the bottom end of the table the signa
44、l from ourenhanced strategy is weaker.Capital Goods andTransport have both low momentum and dispersion,but for the other industries in group 6 dispersion isntparticularly low they rank low within the lowmomentum groups,but not overall.,5,Equity StrategyGlobal26 October 201210.Global,abc,Industry gro
45、upConsumer DurablesMediaInsuranceReal estateHousehold ProductsPharmaSoftware&ServicesUtilitiesEnergyFood&Drug RetailBanksDiversified FinancialsRetailFood&BeverageHealth Care EquipmentTelecomsMaterialsCommercial ServicesConsumer ServicesTech HardwareCapital GoodsTransportAutosSemiconductors,Earnings
46、revision ratio50.446.453.350.758.757.648.045.741.243.243.437.745.642.036.943.225.034.234.828.127.431.331.022.5,Rank573412681412101591316112318172122192024,Dispersion z-score-0.9-1.0-1.8-2.40.50.61.40.9-1.4-1.6-1.0-1.10.0-0.4-0.81.51.74.80.50.9-0.6-1.2-1.40.0,Rank1082117182119539715131122232416201264
47、14,Group111122223333444455556666,Source:HSBC,Thomson Reuters Datastream,IBES,MSCI11.US,Industry groupsConsumer DurablesFood&Drug RetailBanksInsuranceRetailHousehold ProductsPharmaTelecomsMediaDiversified FinancialsUtilitiesEnergyCommercial ServicesFood&BeverageSoftware&ServicesTransportConsumer Serv
48、icesTech HardwareSemiconductorsMaterialsCapital GoodsAutosHealth Care Equipment,Earnings revision ratio68.875.169.962.657.757.355.660.049.550.252.142.739.648.645.919.733.234.319.026.932.518.838.0,Rank3124678511109141512132118172220192316,Dispersion z-score-1.4-1.0-1.2-0.60.20.62.01.5-1.3-1.9-0.50.50
49、.63.11.70.30.31.41.8-1.00.1-1.3-0.8,Rank2659121622194110151723201413182171138,Group11112222333444455556666,Source:HSBC,Thomson Reuters Datastream,IBES,MSCI.NB:Real Estate excluded due to lack of historical data6,Equity StrategyGlobal26 October 201212.Europe,abc,Industry groupsConsumer DurablesFood&B
50、everagePharmaInsuranceConsumer ServicesMediaHousehold ProductsSoftware&ServicesEnergyTransportRetailReal estateCommercial ServicesAutosHealth Care EquipmentTelecomsMaterialsBanksDiversified FinancialsTech HardwareCapital GoodsFood&Drug RetailSemiconductorsUtilities,Earnings revision ratio50.045.157.
