Quant signals for EU equity sectors and styles

Highlights:

• We introduce our proprietary equity valuation tool which provides indications of over- or undervaluation for different sectors and styles of European equities.
• The regression-based models use macro and financial variables to provide fair value estimates of the ratio between the MSCI Europe Sector/Style index and the broad MSCI Europe index.
• Each model is back-tested to ensure the viability of the derived buy/sell strategies. We analyzed the relative performance of each sector/style at different levels of over and undervaluation and over different time spans (1, 3, 6 and 12 months). Generally, the models have the best performance in the 6 to 12 month horizon.
• Currently, financials, telecommunications, energy and utilities look undervalued while industrials, materials and IT appear overvalued. Among the European equity styles, undervaluation is indicated for value, small cap and large cap value while growth, cyclicals, low leverage and large cap stocks look too expensive.

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