Earnings Momentum Strategies
Equity Markets
Foreign Exchange
Earnings Momentum Strategies
Sharemarkets may be experiencing an upswing but corporate earnings have continued to lag – that is, until now. A corporate earnings recovery appears to be underway, and using a strategy that can harness the momentum of earnings may help investors outperform the overall market.

After falling by more than 40% over the 16 months to May 2009, global 12-month forward earnings expectations have risen by almost 10%. The recovery in earnings momentum appears strongest in Emerging Markets and early-cyclical sectors like Consumer Discretionary and IT. All three areas have experienced rebounds of 20% or more in 12-month forward earnings.

As Chart 1 (above) shows, we could be heading towards the middle part of the current earnings cycle, and Citi analysts believe earnings momentum could help investors outperform the market. However they also point out that earnings momentum strategies are often more successful at sector level rather than regional level as regional stock prices tend to be driven more by risk characteristics, GDP expectations, currencies and other factors.

There appears to be a closer relationship between sector prices and forward earnings though often with a 3-month lag. According to Citi analysts, defensive sectors like Consumer Staples and Health Care started to outperform in 2008 ahead of a sharp rise in their relative earnings. Meanwhile, stock prices for cyclical sectors like IT and Materials have correctly anticipated turning points in 12-month forward earnings. For example, relative stock prices for IT began to recover three months before relative earnings began to move higher in the first quarter of 2009.

Among global sectors, Citi analysts favour those sectors likely to benefit from the earnings recovery while still offering reasonable value. In particular, they prefer Financials and Energy.
Source: Factset Citi Investment Research and Analysis. As of 16 September 2009.
Please note past performance is not a reliable indicator of future performance.
Source: Citi Investment Research and Citigroup Economic and Market Analysis
General Disclosure
"Citi analysts" refers to investment professionals within Citi Investment Research and Citi Global Markets (CGM) and voting members of the Global Investment Committee of Global Wealth Management.

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