Analysts' Earnings Forecasts and International Asset Allocation

Abstract

The aim of this paper is to investigate whether financial analysts' earnings forecasts are informative from the viewpoint of allocating investments across different stock markets. Therefore we develop a bottom up country forecast indicator reflecting the analysts' prospects for specific stock markets.

Based on the available analysts' earnings forecasts in the Institutional Brokers Estimate System (I/E/B/S), we calculate a monthly country forecast indicator for the stock markets in Germany, France, Italy, The Netherlands, United Kingdom, and Switzerland over the period 1990 to 1994. The time-series correlations between the monthly value of the indicator and the stock market returns around the date of calculating the indicator show that stock returns rather precede than follow revisions in earnings forecasts. An investment strategy which is based on a monthly asset allocation to that stock market with the highest value of the country forecast indicator in the preceding month, gives a slight outperformance (around 3 percent excess return) compared to an equal allocation of funds to the stock markets involved.

JEL Classification: G11, G29, F21, M41