Sector Rotation in European Markets: Leveraging Earnings News and Corporate Controversies

May 10, 2023

RavenPack's latest white paper demonstrates the predictive power of sentiment analysis in earnings news at the sector level.

Timing sector rotation has become increasingly popular among investors. Earnings-related news, such as estimates, revisions, guidance, and analyst reports provide forward-looking sentiment at the sector level which can be used to predict future performance.

In this paper, we demonstrate the predictive power of sentiment in earnings news to boost sector rotation strategies.

  • Our long-only sector timing strategy, rebalanced quarterly, outperformed the European benchmark from 2010-2023 . Compared with the benchmark, the Top-1 sector had an Information Ratio of 0.74.

  • The strategy successfully timed the Great Value Rotation , reflecting weaker earnings sentiment due to repricing of rates and global recession fears. It rotated from growth sectors to value and defensive stocks, while energy was boosted by geopolitical tensions.

  • Excluding the top 50% of companies with the greatest corporate controversy exposure enhanced the Information Ratio to 0.71 when allocating to the Top-3 sectors, while slightly reducing volatility and downside risks.

Watch the video summary

 Cumulative performance of sector-rotation strategies (left) for various numbers of sectors, and when enhanced with controversy exclusions for the Top-3 sector one (right). Strategies are rebalanced at a quarterly frequency

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