JPM Earnings Momentum 2016-05-08

Global Quantitative and
Derivatives Strategy
09 May 2016
Fundamental Momentum in
Global Markets
Building a better earnings composite
 Quant factors based on revisions in analyst earnings estimates are a type of Global Quantitative Strategy
fundamental momentum that help identify changes in sentiment. They measure the AC
Christopher Ma
relative change in consensus analyst expectations over a period of time. We find
(852) 2800-8530
that earnings and sentiment-based factors when blended together generally perform
christopher.x.ma@jpmorgan.com
more robustly than other factors across the market cycle, although they can incur
Bloomberg JPMA MA <GO>
much higher turnover. We consider Earnings factors as one of the key factor
J.P. Morgan Securities (Asia Pacific) Limited
families and can be classified as Growth or with Price-based Momentum factors, AC
and sit alongside the other equity risk premia of Value, Quality, and Volatility. Robert Smith, PhD
(852) 2800 8569
 We find that ‘metadata’ on earnings forecasts can influence factor behavior – robert.z.smith@jpmorgan.com
notably, the number of analysts covering each stock (along with Size) and skewness Bloomberg JPMA RSMITH <GO>
of the distribution of earnings forecasts. We show we can dynamically adjust the J.P. Morgan Securities (Asia Pacific) Limited
composite weighting based on the coverage which modestly boosts performance. Dubravko Lakos-Bujas
We also show Skewness of estimates is a factor with Quality-like characteristics. (1-212) 622-3601
dubravko.lakos-bujas@jpmorgan.com
 We explore how to blend different Earnings factors together to create a more
effective Composite Fundamental Momentum factor. In our original Q-Score J.P. Morgan Securities LLC
model we developed more than 10 years ago for GEM, the Earnings component Berowne Hlavaty
combines 3 factors to powerful effect: Earnings Momentum, Net Earnings (61-2) 9003-8602
Revisions, and Recommendation Changes. Over the years this has proven to be a berowne.d.hlavaty@jpmorgan.com
combination that is stronger than the sum of its parts and remains hard to beat. J.P. Morgan Securities Australia Limited
Khuram Chaudhry
 For GDM, to achieve robust performance we need to customize the composite for
(44-20) 7134-6297
each major region. Net Revisions works well everywhere and we include it in all of khuram.chaudhry@jpmorgan.com
the regional composites. In Russell 3000, we overweight Recommendation J.P. Morgan Securities plc
Changes and discard Earnings Momentum. In Europe, we add Skewness and Target
Price Revisions, and apply Beta neutralization. In Japan, we discard Earnings Global Head of Quantitative and
Derivatives Strategy
Momentum and Recommendation Changes in favor of Upside to Target Price.
Marko Kolanovic, PhD
Figure 1: Composite Earnings – “Best of breed” blend of Earnings factors (1-212) 272-1438
MSCI GEM – Our 2004 composite from Q-Score Russell 3000 – Overweight Recommend. Changes marko.kolanovic@jpmorgan.com
2,500 0% 350 0%
-10% -10% J.P. Morgan Securities LLC
300
2,000 -20% -20%
-30% 250 -30%
1,500 -40% -40%
200
-50% -50%
150
1,000 -60%
-70%
-60%
-70%
Global Quantitative Strategy
100
500 -80%
50
-80% Marko Kolanovic Global Head
-90% -90%
0 -100% 0 -100% Dubravko Lakos-Bujas Americas
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
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Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Narendra Singh Americas

MSCI Europe – Beta neutralization works best MSCI Japan – Blends in Upside to Target Price Khuram Chaudhry EMEA
500 0% 500 0%
450 -10% 450 -10%
Viquar Shaikh EMEA
400 -20% 400 -20% Ayub Hanif EMEA
350 -30% 350 -30%
300 -40% 300 -40% Robert Smith Asia Pacific
250 -50% 250 -50%
200 -60% 200 -60%
Christopher Ma Asia Pacific
150 -70% 150 -70% Berowne Hlavaty Asia Pacific
100 -80% 100 -80%
50 -90% 50 -90% Michiro Naito Asia Pacific
0 -100% 0 -100%
See page 28 for contact details
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: JPM Quant, MSCI Barra, Thomson Reuters, Bloomberg, Factset. Long-Short deciles.
See page 29 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com
This document is being provided for the exclusive use of Mark Robertson at NNIP ADVISORS B.V..
Christopher Ma Global Quantitative and Derivatives Strategy
(852) 2800-8530 09 May 2016
Table of Contents
Earnings factors: Fundamental momentum...........................3
Introduction to our Composite Earnings model from GEM.......................................3
Extended to a global universe, we find that Earnings factors are still very powerful..4
Factor Reference Books But isn’t Earnings Momentum just Price Momentum in disguise? ............................5
 US What if we neutralize Price Momentum from Revisions? .........................................6
 Europe
Analysts are a good measure of sentiment though changes in expectations ...............7
 Asia ex-Japan
 China Monthly Seasonality – Pay attention in June!...........................................................8
Asia ex-Japan Factor Reference Performance of key Earnings factors .....................................9
Companion Backtest Results:
MSCI GDM – Nothing but Net Revisions................................................................9
 Regional Chartbook
 Country Chartbook MSCI GEM – The blend again is your friend.........................................................10
 Sector Chartbook Size matters, especially to Earnings Momentum and Net
 GEM Chartbook
Revisions ................................................................................11
Other key reports
 Framework for Style Investing Size highly correlated with analyst coverage..........................................................12
 Equity Risk Premia Strategies Analyst coverage – the more the merrier? ...........................13
 Purifying Momentum
 Sorting through the Trash MSCI GEM – Coverage dominates Size effect.......................................................15
 The Trend is your Friend
MSCI GEM – Improving Composite Earnings by adjusting weighting based on
 Beta Aware Alpha
 Macro Factor Rotation analyst coverage....................................................................................................16
 Style timing using MSCI GDM – Size dominates Coverage................................................................17
Macro Indicators
 Country versus Sector Distribution of estimates - the coolness of skewness ........18
 Sector Selection in AsiaPac Min/Max estimates – is it worth listening to the most bearish/bullish analysts?.......18
 The JPM Q-Score for EM
Skew – Looking beyond the mean .........................................................................19
Earnings Momentum performs better in a left skew universe..................................21
Building a better Composite Earnings factor by region .....22
Equity Quant Research Portal
 Product Portfolio MSCI US vs. Russell 3000 ....................................................................................22
 Latest research
MSCI US and Russell 3000 – Improved Composite Earnings.................................23
 Intraday Factor Performance
Monitor MSCI Europe – Worthwhile to neutralize on Beta and Size....................................24
 Q-Snaps for individual MSCI Japan – Keep an eye on the target… price...................................................25
companies
 Pair Trade Ideas Key Conclusions ....................................................................26
 Collated Academic Abstracts
 Quant Conference Summaries
 Screens & Tools:
o Are Global Markets
Cheap or Expensive?
o Commodity Correlations Appendices
o Fallen Angels
o Global Growth Explorer Appendix: Earnings factor definitions..................................27
o JPM vs. The Street
o Looking for Laggards Contacts ..................................................................................28
o PE & PB Floors and Ceilings
o Piotroski Styled Screen
o Price Reactions to
Earnings Announcements
o Q-Scores across Asia
o Revenue Exposure
o Seasonality Matrix
o Sentiment Radar
o Takeover Screen
o Triggered Switch Report
o Yield Seeker
(852) 2800-8530 09 May 2016
Earnings factors: Fundamental momentum

Introduction to our Composite Earnings model from GEM
This report takes an in-depth look at the Earnings family of factors based on analyst
forecasts in the global MSCI universe. In our original benchmark Q-Score quant
model that we developed more than 10 years ago for GEM, for the Earnings
component we combined 3 Earnings factors: Earnings Momentum, Net Earnings
Revisions, and Recommendation Changes.
Figure 2: Q-Score: Factor families and components

Q-Score: Balanced view across
difference sources of alpha VALUATION [30%] EARNINGS [30%]
COMPONENT FACTORS COMPONENT FACTORS
P/E vs. Market (12-mth fwd EPS) [34%] Earnings Momentum 3-mth (Risk Adj.) [34%]
P/E vs. Country Sector (12-mth fwd EPS) [33%] 1-mth Change in Recommendations [33%]
EPS Growth (FY1 mean to FY2 mean) [33%] Net Revisions to mean FY2 EPS [33%]
PRICE MOMENTUM [20%] QUALITY [20%]

COMPONENT FACTORS COMPONENT FACTORS
12-mth Price Momentum [75%] Historical ROE [50%]
1-mth Price Reversion [25%] Earnings Certainty (Var. in Forecast EPS) [50%]
Source: J.P. Morgan Quant
Source: J.P. Morgan Quantitative and Derivative Strategy
Over the years, this formula has proven to be very effective out-of-sample and a
strong combination of earnings factors that is greater than the sum of its parts.
Figure 3: MSCI GEM: Composite Earnings and component factors

Net Revisions differs from 1,800
Earnings Momentum in that the Composite
1,600 Strong Earnings, 1,634
former just counts the net
number of upward less Developed perfomrance
1,400 GEM model
downward revisions to EPS, out of sample
in 2004
whereas the latter measures the 1,200
percentage change in
consensus mean EPS. 1,000
Net Revisions, 945
800 Earnings
Recommendations are based on
Momentum, 832
a scale of 1 to 5 where 1=Strong 600 Recommendation
Buy and 5=Strong Sell.
Changes, 647
400
For more details, see the
Appendix. 200
0
Base
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Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: J.P. Morgan Quantitative and Derivative Strategy, MSCI Barra, Thomson Reuters. Country Neutralized, Long-Short deciles.
This combination of Earnings factors however hasn’t worked nearly as well in GDM.
In this paper, we revisit this Composite Earnings factor and tune it for better
performance in GDM. In the process, we also explore Skewness and the impact of
Size and Coverage (number of analyst estimates).
(852) 2800-8530 09 May 2016
Extended to a global universe, we find that Earnings factors

are still very powerful
Looking at MSCI AC World for a broader global perspective, we still find significant
alpha in Earnings factors, although not quite as strong as standalone MSCI GEM.
Composite Earnings still has a very respectable Sharpe ratio of 1.19 and Information
Ratio of 1.40, and the only time it really stumbles is during the GFC when it suffered
drawdowns of -20%. Turnover is very high however at 73% per month (one-way).
Recommendation Changes (both 1M and 3M) performs very smoothly with low
volatility and drawdowns. Earnings Momentum and Net Revisions have similar
return profiles, but different enough that they complement each other well when
blended with Recommendation Changes to build Composite Earnings, which has
better returns and lower volatility.
Figure 4: MSCI AC World – Performance of key Earnings factors
Std Avg Std
Avg Hit Turn Avg
Factor Avg IC T-Stat Dev Sharpe Ret Dev IR
Stocks Rate Over Ret LS
Ret LS Active Active
Earnings Momentum 1M 2233 1.59% 3.23 65.7% 77% 0.51% 7.9% 0.76 0.40% 4.1% 1.25
Earnings Momentum 3M (Risk Adj.) 2137 1.71% 2.56 62.3% 45% 0.38% 7.4% 0.59 0.24% 4.4% 0.73
Earnings Momentum (Avg 1M & 3M) 2210 1.46% 2.11 65.2% 47% 0.39% 9.3% 0.47 0.25% 4.6% 0.68
Net Earnings Revisions 2227 1.76% 3.80 68.6% 80% 0.53% 6.9% 0.91 0.39% 3.9% 1.35
Net Earnings Revisions (relative to chg.) 2208 2.17% 4.80 68.1% 77% 0.59% 6.2% 1.16 0.34% 3.8% 1.21
Recommendation Changes 1M 2281 1.07% 5.11 69.6% 88% 0.42% 4.1% 1.24 0.24% 2.4% 1.28
Target Price Net Revisions 1884 1.87% 1.08 58.5% 74% 0.23% 10.4% 0.21 0.11% 6.3% 0.21
Target Price Upside 1944 1.08% 1.80 52.9% 38% 0.54% 14.9% 0.37 0.26% 10.0% 0.15
Composite Earnings 2235 2.17% 4.92 69.6% 73% 0.67% 6.8% 1.19 0.39% 3.7% 1.40
1M Earnings Momentum Net Earnings Revisions (relative to total changes)
400 0% 400 0%
350 -10% 350 -10%

-20% -20%
300 300
-30% -30%
250 -40% 250 -40%
200 -50% 200 -50%
150 -60% 150 -60%

-70% -70%
100 100
-80% -80%
50 -90% 50 -90%
0 -100% 0 -100%
Base
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Nov-15
1M Recommendation Changes Composite Earnings

400 0% 400 0%
350 -10% 350 -10%

-20% -20%
300 300
-30% -30%
250 -40% 250 -40%
200 -50% 200 -50%
150 -60% 150 -60%

-70% -70%
100 100
-80% -80%
50 -90% 50 -90%
0 -100% 0 -100%
Base
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
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Nov-11
Nov-12
Nov-13
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Nov-99
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Nov-04
Nov-05
Nov-06
Nov-07
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Nov-09
Nov-10
Nov-11
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Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Sector Neutralized, Long-Short decile portfolios. Test period: Dec 1998 – March 2016.
(852) 2800-8530 09 May 2016
But isn’t Earnings Momentum just Price Momentum in

disguise?
Looking globally at analyst revisions in aggregate, it’s not surprising that analysts are
influenced by the stock price. The chart below shows for MSCI AC World the net
revisions ratio (#upward revisions - #downward revisions)/(#total revisions)
aggregated for all stocks as a measure of analyst sentiment, as well as the trailing 6
month returns of the overall index. We can see that there is a high level of
correlation – and while this isn’t necessarily causation, it’s easy to see how analysts
could be influenced by stock prices.
Figure 5: MSCI AC World - EPS Revisions Landscape – Backward looking on timing markets
This chart (as well as those for 50% 50%
individual regions and countries) FY2 Revision Ratio (RHS) Trailing 6 month Performance (LHS)
40%
is available every week with
trailing 4 week revisions data – 30%
30%
please ask us for the weekly EPS
Revisions Landscape 20%
10%
distribution if you would like to
10%
be added.
0% -10%
-10%
-30%
-20%
-30%
-50%
-40%
-50% -70%
30-Apr-94
30-Apr-95
30-Apr-96
30-Apr-97
30-Apr-98
30-Apr-99
30-Apr-00
30-Apr-01
30-Apr-02
30-Apr-03
30-Apr-04
30-Apr-05
30-Apr-06
30-Apr-07
30-Apr-08
30-Apr-09
30-Apr-10
30-Apr-11
30-Apr-12
30-Apr-13
30-Apr-14
30-Apr-15
26-Apr-16
Source: J.P. Morgan Quantitative and Derivative Strategy, Thomson Reuters, MSCI
Indeed, the average cross-sectional correlation between Net Revisions and 6M Price
Momentum over the past 22 years is 30%. While this correlation isn’t exceptionally
high, it still shows there is a significant and consistent relationship between the trend
of the stock prices and analysts revisions.
Figure 6: MSCI AC World – Cross-sectional correlation of 6M Price Momentum and Net Revisions
This chart shows there is a 50%
significant and consistent
relationship between the trend of 40%
the stock prices and analysts
revisions. 30%
20%
10%
0%
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
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Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Correlation of 6M Price Momentum and Net Revisions

Source: J.P. Morgan Quantitative and Derivative Strategy, Thomson Reuters, MSCI
Monthly time series of cross-sectional correlations on Z-scores.
(852) 2800-8530 09 May 2016
But judging from the performance of 6M Price Momentum and Net Revisions
factors, analysts are adding value by ostensibly interpreting what the market price
action is telling us. Even though Price Momentum may influence analysts in their
earnings revisions, we can see from the results that it’s not the same thing – what’s
important is how analysts interpret the information the market is telling them and
what’s driving the price action. In other words, they are very good at answering the
question, “What’s in the price?” and particularly how well it’s relatively valued.
Figure 7: MSCI AC World – Net Revisions handily outperforms Price Momentum

Looking at analysts revisions in 400
aggregate is a poor backward 350 Net Revisions,
looking signal for market timing. 330
But looking at analysts relative 300
revisions on single stocks is 250

forward locking and a good
200
signal for picking stocks.
150 PMom 6M
Lag 1M, 146
100
50
0
Base
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Nov-00
Nov-01
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Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
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Nov-13
Nov-14
Nov-15
Source: J.P. Morgan Quantitative and Derivative Strategy, MSCI Barra, Thomson Reuters. Sector Neutralized, Long-Short deciles.
We lag the 6M Price Momentum by 1 month to match the same point-in-time that
analysts begin making their revisions for a more fair comparison. This also
effectively helps the performance of Price Momentum, as the previous month of
returns (1M Price Momentum) is typically stronger as a reversal signal than a
continuation signal. In other words, 6M Price Momentum Lagged 1 Month is a
stronger performer than 6M Price Momentum with no lag. Even with this help of
stripping out the reversal effect, Net Revisions beats Price Momentum hands down.
What if we neutralize Price Momentum from Revisions?

If we neutralize the exposure of Price Momentum on the Net Revisions signal, we
see that this can be an effective way of generating better risk-adjusted returns with a
Sharpe of 1.45, compared to a Sharpe of 1.16 for sector neutralization or a Sharpe of
1.01 left un-neutralized.
Figure 8: MSCI AC World – Net Earnings Revisions (relative changes) neutralization comparison
450
Net Revisions
400 (Pmom Neutral),
407
350 Net Revisions
(Free), 379
300 Net Revisions
(Sector Neutral),
250 330
200
150
100
50
0
Base
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Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: J.P. Morgan Quant, MSCI Barra, Thomson Reuters. L-S deciles. Neutral on PMom 3M (Lagged 1M) on quintile buckets
(852) 2800-8530 09 May 2016
Analysts are a good measure of sentiment though changes

in expectations
We also find that the power of the Earnings factors lies in relative revisions – that is,
how much analysts are upgrading/downgrading their estimates compared to other
stocks. Analysts are very good at indicating a relative changes in preference for one
stock over another, but arguably less good at picking winners and losers on an
absolute basis. We can see this mostly clearly in the chart below which shows the
poor performance of the Recommendations factor – longing stocks with the highest
consensus rating and shorting the stocks with the lowest consensus rating, with the
ratings being a scale from 1-5 of Strong Buy, Buy, Neutral, Sell, and Strong Sell.
The Recommendation Changes factor on the other hand shows consistently strong
performance.
Figure 9: MSCI AC World – Recommendations vs. Recommendation Changes

Analysts are very good at 250
Recommendation
identifying relative changes in Changes 1M, 236
sentiment, but poor at picking
absolute winners and losers. 200
150
Absolute
Recommendations
100 113
50
0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: J.P. Morgan Quantitative and Derivative Strategy, MSCI Barra, Thomson Reuters. Sector Neutralized, Long-Short deciles.
Earnings factors derive their Thus it’s a key characteristic of Earnings factors to measure changing expectations,
power from measuring rather than just the absolute level of earnings or recommendations. Measuring the
sentiment through the change in absolute level of earnings in the form of profit margins and ROE would be more in
expectations over a period of
time, rather than the expectation
the realm of Quality factors. Looking at changing expectations also captures the
level itself – this is why it’s a analyst herding effect. This is when an analyst’s revisions can trigger other analysts
type of fundamental momentum. to revise their numbers as well. The cascading effect is one reason why early
revisions can be an indication of future revisions to come.
In summary, an effective Earnings factor attempts to capture market sentiment

though the change in analyst expectations, measured by the relative net number of
revisions, changes in earnings forecasts, or changes in recommendations. Earnings
factors get their power from measuring improving or deteriorating sentiment, which
through herding has the knock-on effect of being “contagious”.
(852) 2800-8530 09 May 2016
Monthly Seasonality – Pay attention in June!

The timing of earnings seasons can definitely impact the performance of Earnings
factors, as does the holiday season – December, January, and February are
consistently weak months for Earnings Momentum and Net Revisions during the past
10 years. This is likely due to the holiday season, new annual risk budgets for
portfolio managers, and strong seasonal effects of other factors such as Value and
Price Momentum (the “January effect”). We also find that June is consistently a very
important month to pay attention to earnings and revisions, both for GDM and GEM.
Figure 10: Monthly seasonality of Earnings Momentum and Net Revisions in GDM and GEM (past 10 years)
MSCI GDM: Earnings Momentum MSCI GDM: Net Revisions
8.0% 2.5% 8.0% 2.5%
Avg. IC (LHS) Avg. Ret (RHS) 2.0% Avg. IC (LHS) Avg. Ret (RHS)
6.0% 6.0% 2.0%
1.5% 1.5%
4.0% 1.0% 4.0%
1.0%
2.0% 0.5% 2.0%
0.5%
0.0% 0.0% 0.0%
(0.5%) 0.0%
(2.0%) (1.0%) (2.0%) (0.5%)
(4.0%) (1.5%) (4.0%) (1.0%)
March
June
March
June
January
February
April
May
July
January
February
April
May
July
September
October
November
December
September
October
November
December
August
August
MSCI GEM: Earnings Momentum MSCI GEM: Net Revisions
8.0% 2.0% 8.0% 2.5%
Avg. IC (LHS) Avg. Ret (RHS) Avg. IC (LHS) Avg. Ret (RHS)
7.0% 7.0%
1.5% 2.0%
6.0% 6.0%
5.0% 1.0% 1.5%
5.0%
4.0% 1.0%
0.5% 4.0%
3.0% 0.5%
2.0% 0.0% 3.0%
2.0% 0.0%
1.0%
(0.5%) 1.0% (0.5%)
0.0%
(1.0%) (1.0%) 0.0% (1.0%)
September
October
November
December
March
June
August
January
February
April
May
July
March
June
January
February
April
May
July
September
October
November
December
August
Source: J.P. Morgan Quantitative and Derivative Strategy, MSCI, Thomson Reuters IBES.
Interestingly, over the past 10 years, next to December, June is the slowest month of
the year in terms of the number of earnings announcements. This is the case for
GDM and GEM, and in both universes June accounted for just 1.0% of total earnings
announcements. Perhaps during the quiet period, analysts are busy talking clients
leading up to July, which is the month with the most earnings announcements in
GDM, and the second most in GEM. The day with the most earnings
announcements in both universes is the last day of July.
Figure 11: Earnings announcement date histogram (past 10 years)

MSCI GDM MSCI GEM
1400 600
1200
500
1000
400
800
300
600
200
400
200 100
0 0
Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1
Source: J.P. Morgan Quantitative and Derivative Strategy, MSCI, Bloomberg.
(852) 2800-8530 09 May 2016
Performance of key Earnings factors

Splitting MSCI AC World into GDM and GEM, we see that in GDM Earnings
factors struggle much more to generate alpha, suggesting that GEM is propping up
the performance in the global backtest.
MSCI GDM – Nothing but Net Revisions

The only time that Net Revisions In GDM, we find large differences in the behavior of factors in sub-regions within
really stumbled is during the GDM (i.e. US, Europe, and Japan). Thus we suggest targeting region-specific
GFC, and it has been working Earnings factors for developed markets. Nevertheless, it’s useful to consider the
again since 2014.
whole of GDM to identify broad-based themes. The best Earnings factor out of the
box is Net Revisions (relative to total changes). It works equally well on the long
side and the short side, but like most other earnings factors is high turnover (76%).
Figure 12: MSCI GDM – Key Earnings Factors (Sector Neutralized)
Std Avg Std
Avg Hit Turn Avg
Net Earnings Revisions (relative chg.) 1512 1.61% 3.49 62.3% 76% 0.43% 6.1% 0.83 0.24% 3.9% 0.85
Target Price Upside 1348 0.85% 1.29 50.5% 39% 0.43% 16.3% 0.24 0.21% 11.2% 0.05
1M Earnings Momentum Net Earnings Revisions (relative to changes)
250 0% 250 0%
-10% -10%
200 -20% 200 -20%
-30% -30%
150 -40% 150 -40%
-50% -50%
100 -60% 100 -60%
-70% -70%
50 -80% 50 -80%
-90% -90%
0 -100% 0 -100%
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15

250 0% 250 0%
-10% -10%
200 -20% 200 -20%
-30% -30%
150 -40% 150 -40%
-50% -50%
100 -60% 100 -60%
-70% -70%
50 -80% 50 -80%
-90% -90%
0 -100% 0 -100%
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
(852) 2800-8530 09 May 2016
MSCI GEM – The blend again is your friend

Looking at the stellar performance of these same Earnings factors in GEM, we see
where the good performance of these factors in AC World comes from. As with AC
World, Composite Earnings is hard to beat with an impressive Sharpe ratio of 2.08
and Information ratio of 1.73. Again, Recommendation Changes is a very smooth
and consistent factor with low volatility, while Earnings Revisions and Net Revisions
show similar return profiles. Blended together into Composite Earnings, we see that
the combination is greater than the sum of its parts with superior risk-adjusted
returns. It’s hard to imagine a more perfect union that has worked so well out of
sample for 10 years.
Figure 13: MSCI GEM – Standard Earnings Factors

Std Avg Std
Avg Hit Turn Avg
Net Earnings Revisions (relative chg.) 691 3.19% 6.22 70.5% 79% 1.21% 9.7% 1.55 0.54% 6.2% 1.20
Target Price Upside 596 -0.23% 0.52 49.0% 35% 0.21% 19.9% 0.02 0.07% 13.2% -0.07
1,800 0% 1,800 0%
1,600 -10% 1,600 -10%
1,400 -20% 1,400 -20%

-30% -30%
1,200 1,200
-40% -40%
1,000 1,000
-50% -50%
800 800
-60% -60%
600 600
-70% -70%
400 -80% 400 -80%
200 -90% 200 -90%
0 -100% 0 -100%
Base
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15

1,800 0% 1,800 0%
1,600 -10% 1,600 -10%
1,400 -20% 1,400 -20%

-30% -30%
1,200 1,200
-40% -40%
1,000 1,000
-50% -50%
800 800
-60% -60%
600 600
-70% -70%
400 -80% 400 -80%
200 -90% 200 -90%
0 -100% 0 -100%
Base
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Country Neutralized, Long-Short decile portfolios. Test period: Dec 1998 – March 2016.
10
(852) 2800-8530 09 May 2016
Size matters, especially to Earnings

Momentum and Net Revisions
Earnings Momentum and Net For both GDM and GEM, we see that the Earnings factors perform much stronger in
Revisions work better in small the small cap universe for Earnings Momentum and Net Revisions. This is no
caps, and Recommendation surprise, given that we have already seen the Earnings factors performing
Changes works better in large
caps. This Size effect is the
dramatically better in Russell 3000 over MSCI US.
same in both GDM and GEM.
For Recommendation Changes, we see that Sharpe ratios are higher in the large cap
space. Absolute levels of returns are similar, but returns volatility is lower in the
large cap universe. At the composite level, there is not much difference in risk-
adjusted returns.
Figure 14: MSCI GDM – Small vs. Big Cap Universe (Bottom vs. Top 50% of universe split by market cap)
Std Avg Std
Avg Hit Turn Avg
GDM
1M Earnings Momentum (Small Cap) 810 1.21% 1.87 61.4% 75% 0.41% 11.0% 0.40 0.26% 5.5% 0.62
1M Earnings Momentum (Large Cap) 810 0.74% 0.36 55.1% 76% 0.06% 9.1% 0.04 0.10% 4.7% 0.24
Net Revisions Rel to Chgs (Small Cap) 810 1.87% 3.65 65.7% 77% 0.55% 7.4% 0.87 0.32% 4.5% 0.98
Net Revisions Rel to Chgs (Large Cap) 810 1.04% 1.97 56.0% 75% 0.27% 6.7% 0.45 0.11% 4.1% 0.39
Recommend. Changes 1M (Small Cap) 810 0.60% 1.38 50.7% 88% 0.18% 6.6% 0.30 0.13% 4.1% 0.38
Recommend. Changes 1M (Large Cap) 810 0.34% 1.74 54.6% 89% 0.17% 4.7% 0.40 0.15% 2.8% 0.66
Composite Earnings (Small Cap) 810 1.26% 1.37 59.9% 73% 0.26% 9.6% 0.28 0.19% 4.7% 0.57
Composite Earnings (Large Cap) 810 0.95% 1.47 58.0% 70% 0.23% 7.8% 0.32 0.14% 4.4% 0.41
GEM
1M Earnings Momentum (Small Cap) 395 3.19% 5.17 68.6% 77% 1.26% 12.1% 1.26 0.71% 7.6% 1.20
1M Earnings Momentum (Large Cap) 395 2.66% 4.08 62.3% 74% 0.93% 11.4% 0.97 0.48% 7.2% 0.77
Net Revisions Rel to Chgs (Small Cap) 395 2.99% 6.13 72.5% 78% 1.37% 11.1% 1.53 0.63% 7.7% 1.13
Net Revisions Rel to Chgs (Large Cap) 397 2.85% 3.66 59.4% 78% 0.82% 11.2% 0.86 0.48% 6.9% 0.89
Recommend. Changes 1M (Small Cap) 395 2.11% 4.69 64.7% 87% 0.94% 10.0% 1.13 0.44% 6.6% 0.86
Recommend. Changes 1M (Large Cap) 397 2.40% 5.71 67.6% 88% 0.98% 8.6% 1.41 0.41% 5.5% 0.95
Composite Earnings (Small Cap) 395 3.57% 7.02 68.6% 76% 1.43% 10.1% 1.77 0.81% 6.7% 1.64
Composite Earnings (Large Cap) 397 4.03% 7.13 71.0% 75% 1.48% 10.3% 1.80 0.70% 6.1% 1.50
MSCI GDM – Large Cap vs. Small Cap Sharpe Ratios MSCI GEM – Large Cap vs. Small Cap Sharpe Ratios
1.00 2.00
0.90 1.80
0.80 1.60
0.70 1.40
0.60 1.20
0.50 1.00
0.40 0.80
0.30 0.60
0.20 0.40
0.10 0.20
0.00 0.00
Earnings Mom Net Revisions Rec Changes Composite Momentum Earnings Mom Net Revisions Rec Changes Composite Momentum
Small Large Small Large
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Sector (GDM) Country (GEM) Neutralized, Long-Short decile portfolios.
Test period: Dec 1998 – March 2016.
11
(852) 2800-8530 09 May 2016
Size highly correlated with analyst coverage

It’s not surprising that we see a high correlation between Size and analyst coverage.
Analysts are incentivized to cover the larger cap names because they have higher
turnover on average and thus generate more trading commissions.
Looking at the time series of cross-sectional correlations between the Z-scored

number of FY1 estimates and Z-scored log of the US$ market cap, we can see that
MSCI GDM has an average correlation of 51.9% and MSCI GEM with 39.9%.
Figure 15: MSCI GDM – Correlation of Estimate Count and Size

70%
60%
50%
40%
30%
20%
10%
0%
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
MSCI GDM: Correlation of Estimate Count and Market Cap
Source: Thomson Reuters IBES, MSCI, J.P. Morgan Quantitative and Derivative Strategy.
Figure 16: MSCI GEM – Correlation of Estimate Count and Size

70%
60%
50%
40%
30%
20%
10%
0%
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
MSCI GEM: Correlation of Estimate Count and Market Cap
Source: Thomson Reuters IBES, MSCI, J.P. Morgan Quantitative and Derivative Strategy.
In the next section, we look and see if the effect of analyst coverage is the same as
Size on Earnings factors.
12
(852) 2800-8530 09 May 2016
Analyst coverage – the more the merrier?

A note about estimates data: Earnings factors that we commonly use depend on sell-side analysts who cover the
In our report, we use Thomson stocks to make recommendations, forecast earnings, and set target prices. These
Reuters I/B/E/S data for analysts play an important role in helping investors understand what is “priced in” a
estimates, which have some of
the longest history available.
stock price and setting market expectations. Thus it’s important to have sufficient
Other estimates datasets include coverage in order to come to a consensus.
Factset and Bloomberg, as well
as country-specific datasets Since 1998, the beginning of our backtesting period, coverage declined for a number
such as GTA and Wind for China of years after the bursting of the Tech bubble and the ensuing tougher regulatory
A-Shares. Specialist datasets environment led to a mass exodus of analysts. However since 2005, coverage has
such as Starmine also make an
improved in both GDM and GEM. Historically GEM was under-covered relative to
effort to put more weighting on
“star” analysts estimates and GDM, but during 2008 to 2012 that gap narrowed with the street improving coverage
recommendations. from 10 to 17 analysts on average covering a stock.
Figure 17: MSCI GDM and GEM - Average analyst coverage over time
20
18
16
14
12
10
GDM GEM
Source: Thomson Reuters IBES, MSCI, J.P. Morgan
However, looking at the most recent data broken down by country, the table on the
next page shows that we still see a wide range of coverage. Even within the large-
cap MSCI universe, there are a number of stocks with only a single analyst setting
the consensus forecasts. A consensus of 1 is hardly democratic.
This can have a significant influence on the behavior of earnings factors – a single
analyst can have much more impact on a stock with just 3 analysts covering it
compared with a stock with coverage of 30 analysts.
13
(852) 2800-8530 09 May 2016
Table 1: MSCI AC World – Analyst coverage by country as of March 31, 2016

Analyst Coverage
Average number of covering Number of Standard
Average Minimum Maximum
analysts by country Stocks Deviation
MSCI GDM MSCI GDM 1635 17.2 8.3 1 52

Australia 73 13.7 2.6 7 20
Australia
Austria 5 19.2 3.2 15 23
Austria
Belgium
Belgium 11 17.6 6.2 5 27
Canada Canada 87 12.2 5.4 1 25
Denmark Denmark 16 18.3 8.0 2 32
Finland Finland 12 20.4 5.0 9 29
France France 73 20.3 7.2 3 35
Germany Germany 54 24.8 8.3 3 39
Hong Kong Hong Kong 44 13.6 5.0 3 24
Ireland
Israel
Ireland 5 17.8 7.1 8 25
Italy Israel 12 7.3 9.7 1 35
Japan Italy 25 19.0 9.3 1 31
Netherlands Japan 318 11.1 5.5 1 30
New Zealand Netherlands 23 20.1 9.2 2 37
Norway New Zealand 7 7.6 2.6 6 13
Portugal Norway 8 23.8 7.3 12 32
Singapore
Portugal 4 21.3 9.1 8 29
Spain
Sweden Singapore 28 16.0 4.5 6 23
Switzerland Spain 25 25.4 6.8 8 37
UK Sweden 28 20.1 8.1 2 35
USA Switzerland 39 18.3 9.5 2 35
0 10 20 30 United Kingdom 113 19.1 5.4 5 30
United States 625 19.7 8.5 1 52
MSCI GEM MSCI GEM 812 15.9 8.9 1 51

Brazil 59 10.6 4.0 1 18
Brazil Chile 19 8.2 3.8 2 16
Chile
China China 152 16.8 6.9 1 33
Colombia Colombia 8 4.0 3.7 1 12
Czech Rep. Czech Republic 3 12.3 4.7 7 16
Egypt Egypt 3 5.7 2.9 4 9
Greece Greece 10 10.2 3.0 5 14
Hungary Hungary 3 12.3 4.0 8 16
India India 73 27.6 11.4 1 51
Indonesia
Korea
Indonesia 30 16.3 4.1 3 22
Malaysia Korea 101 22.7 9.5 1 44
Mexico Malaysia 43 17.3 6.0 4 27
Peru Mexico 27 11.4 4.1 1 17
Philippines Peru 3 13.7 5.1 8 18
Poland Philippines 22 9.7 2.7 4 14
Qatar Poland 23 14.9 3.8 7 24
Russia
Qatar 10 6.3 2.9 2 11
South Africa
Taiwan Russia 15 8.5 6.0 1 18
Thailand South Africa 54 8.9 4.4 1 15
Turkey Taiwan 86 15.0 7.3 1 32
UAE Thailand 32 17.6 7.2 1 27
0 10 20 30 Turkey 25 13.6 3.6 5 19
United Arab Emirates 11 7.5 2.9 2 12
Source: MSCI, Thomson Reuters IBES, JPM
MSCI AC World 2447 16.8 8.5 1 52
Source: MSCI, Thomson Reuters IBES, J.P. Morgan
Given the importance of analyst coverage in Earnings factors, we devise a simple test
of splitting the universe into 2 between the most covered companies and the least
covered companies. We then test the Earnings factors in each of these high coverage
and low coverage sub-universes and see whether there is a difference in performance
in these factors (just as we did for testing the effect of Size).
14
(852) 2800-8530 09 May 2016
MSCI GEM – Coverage dominates Size effect

In GEM, earnings factors work In GEM, analyst coverage makes a significant and consistent impact in the
better with higher coverage, performance of all the tested earnings factors. All the factors had improved
especially Recommendation performance in a higher coverage universe on both an absolute return basis as well as
Changes. This is notable
because the higher coverage
risk-adjusted basis. This could be due to the addition of a Quality effect in the large
stocks are typically the large cap, high coverage space that has greater information certainty. The Earnings
caps. Thus, coverage is a Certainty factor (dispersion in analysts forecasts for a stock) works well in GEM
strong effect because it has to (preferring high certainty) while it does not for GDM.
work against the Size effect.
This could be due to the addition Thus the effect on Earnings factors of analyst coverage dominates the Size effect for
of a Quality effect in the large Earnings Momentum and Net Revisions. There is a dramatic difference in the
cap, high coverage stocks in Recommendation Changes factor, which saw average L-S returns and risk-adjusted
GEM. returns more than triple in the high coverage space over the low coverage space.
This is because the Size effect is actually working for it, as we’ve seen that the
Recommendation Changes factor works better in large caps.
Figure 18: MSCI GEM – Low vs. High Coverage (Bottom vs. Top 50% of universe split by analyst coverage)
Std Avg Std
Avg Hit Turn Avg
1M Earnings Momentum (Low) 397 2.64% 4.84 66.2% 74% 0.85% 8.8% 1.17 0.43% 5.5% 1.02
1M Earnings Momentum (High) 397 3.37% 4.87 69.1% 71% 1.06% 10.9% 1.18 0.52% 6.1% 1.12
Net Revisions (Rel. to Chgs) (Low) 397 2.54% 3.47 61.4% 77% 0.74% 10.6% 0.81 0.38% 7.1% 0.69
Net Revisions (Rel. to Chgs) (High) 397 3.70% 5.23 66.7% 77% 1.20% 11.5% 1.28 0.62% 6.5% 1.30
Recommendation Changes 1M (Low) 397 1.60% 2.25 56.0% 79% 0.34% 7.5% 0.51 0.15% 5.3% 0.33
Recommendation Changes 1M (High) 397 2.91% 7.20 71.5% 83% 1.03% 7.1% 1.80 0.48% 4.9% 1.37
Composite Earnings (Low) 397 3.16% 6.32 67.6% 71% 0.98% 7.7% 1.56 0.54% 5.1% 1.41
Composite Earnings (High) 397 4.56% 6.82 73.4% 71% 1.37% 10.0% 1.71 0.62% 5.8% 1.46
900 900
High,
800 High, 805 800
1,064
700 700
600 600
Low, 545
500 500
400 400 Low, 416
300 300
200 200
100 100
0 0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15

900 1,800
High,
800 1,600 High,
1,064
1,533
700 1,400
600 1,200
500 1,000
400 800 Low, 712

300 600
200 Low, 193 400
100 200
0 0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Country Neutralized, Long-Short decile portfolios. Test period: Dec 1998 – March 2016.
15
(852) 2800-8530 09 May 2016
MSCI GEM – Improving Composite Earnings by adjusting

weighting based on analyst coverage
We condition the weights on our Using what we’ve found on the impact of coverage on earnings factors, we attempt
Composite Earnings with here to condition some of the inputs of an Earnings Composite with coverage. As we
coverage to boost performance. know that Recommendation Changes works better in higher coverage, we
We dynamically set the weight
on Recommendation Changes
dynamically set the weight on the Recommendation Changes factor depending on its
depending on its coverage relative coverage ranking (based on Z-Scores).
relative to other stocks.
Thus if stock A has higher coverage than stock B, it will also have a higher
weighting on Recommendation Changes than stock B in the ranking formula. Note
that this is different than introducing Coverage as another factor in the multi-factor
Composite Earnings (this by the way didn’t work).
We see that this has a soft touch in improving the risk-adjusted returns for the
composite. Of course, we aren’t surprised this works as it’s all in-sample, but still it
can be a useful technique to exploit this coverage effect.
Figure 19: Composite Earnings boosted by coverage

Avg Avg Std
Avg Avg T- Hit Turn Std Dev
Factor Ret Sharpe Ret Dev IR
Stocks IC Stat Rate Over Ret LS
LS Active Active
GEM Composite: Coverage weighted
Rec Changes 1M (favoring higher coverage) +
794 3.84% 8.65 77.3% 74% 1.50% 8.7% 2.21 0.78% 5.4% 1.97
Net Revisions (neutral on coverage) +
Earnings Mom 3M (neutral on coverage)
GEM Earnings Composite: Equal weighted
Recommendation Changes 1M +
794 3.87% 8.17 74.4% 74% 1.39% 8.5% 2.08 0.69% 5.3% 1.73
Net Revisions +
Earnings Momentum 3M (risk adjusted)
GEM Earnings Composite – Cumulative returns GEM Earnings Composite – Decile portfolio returns
2,500 25%
21.8%
Coverage Weighted Equal Weighted

20.5%
Coverage
18.6%
2,000 Weighted,
2,059 20%
16.3%
Equal
15.1%
Weighted,
14.3%
1,500 1,634
15%
11.6%
11.4%
10.9%
10.8%
10.7%
10.3%
10.3%
10.3%
1,000
7.8%
10%
7.1%
6.6%
5.7%
500
5%
1.9%
1.7%
0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
0%
1 2 3 4 5 6 7 8 9 10
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Sector (GDM) Country (GEM) Neutralized, Long-Short decile portfolios. Test period: Dec '98 – March ‘16.
16
(852) 2800-8530 09 May 2016
MSCI GDM – Size dominates Coverage

Counterintuitively, we see the performance of Earnings factors generally work better
in a lower coverage universe than a higher coverage universe in GDM. We believe
this to be due to the Size effect dominating the analyst coverage effect – as we saw
previously, Earnings Momentum and Net Revisions work best in the small cap
universe. The exception to this is Recommendation Changes, which works better in
a large cap universe. Thus, it's not surprising that Recommendation Changes also
works better in a higher coverage universe.
Figure 20: MSCI GDM – Low vs. High Coverage (Bottom vs. Top 50% of universe split by analyst coverage)
Std Avg Std
Avg Hit Turn Avg
1M Earnings Momentum (Low) 810 1.46% 2.05 57.5% 76% 0.39% 9.6% 0.45 0.31% 6.0% 0.69
1M Earnings Momentum (High) 810 0.90% 0.21 55.1% 75% 0.04% 10.1% 0.00 0.01% 4.7% 0.03
Net Revisions (Rel. to Chgs) (Low) 810 1.75% 2.97 63.8% 76% 0.50% 8.3% 0.69 0.23% 5.2% 0.61
Net Revisions (Rel. to Chgs) (High) 810 1.44% 1.95 60.4% 73% 0.30% 7.7% 0.44 0.12% 5.1% 0.38
Recommendation Changes 1M (Low) 810 0.57% 0.74 48.3% 87% 0.09% 6.0% 0.15 0.15% 3.6% 0.52
Recommendation Changes 1M (High) 810 0.71% 2.09 59.4% 88% 0.25% 6.0% 0.48 0.23% 3.6% 0.82
Composite Earnings (Low) 810 1.17% 1.64 59.4% 71% 0.30% 9.0% 0.36 0.22% 5.0% 0.60
Composite Earnings (High) 810 1.27% 0.85 59.4% 68% 0.17% 10.0% 0.16 0.15% 5.2% 0.42

250 300
Low, 263
Low, 209 250
200
200
150 High, 178
150
100 High, 100
100
50
50
0 0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15

200 200
180 180
Low, 172
160 High, 164 160
140 140
High, 131
120 Low, 117 120
100 100
80 80
60 60
40 40
20 20
0 0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
17
(852) 2800-8530 09 May 2016
Distribution of estimates - the coolness of

skewness
For the standard earnings factors, we typically look at the mean value of analyst
estimates. We have not seen much literature for factor construction looking beyond
the simple mean. Particularly, we can glean more information from additional
statistics that describe the distribution of analyst estimates, such as skew, min, max,
range, median, and standard deviation. In this section, we explore whether these
metrics can help improve our earnings factors.
Min/Max estimates – is it worth listening to the most

bearish/bullish analysts?
The plain old Mean consensus It’s an interesting question whether the momentum of the most bullish and bearish
earnings estimate is more estimates can add value beyond the standard mean earnings momentum. That is, if
effective than looking at the the most bullish (bearish) analysts are getting more bullish (bearish), or capitulating,
most bullish or most bearish
estimates
does this gives us any additional information?
Right off the bat, the long-short performance of EMinMom and EMaxMom is
underwhelming relative to EMeanMom. This suggests that it’s better to pay attention
to the average consensus rather than to the extremes, and is a bit counterintuitive as
we expect the most bullish (bearish) analysts to get more airtime and attention.
Figure 21: MSCI GEM – Low vs. High Coverage (Bottom vs. Top 50% of universe split by analyst coverage)
Std Avg Std
Avg Hit Turn Avg
GDM: EMeanMom 1M 1543 0.82% 1.23 55.6% 76% 0.20% 8.2% 0.26 0.17% 4.0% 0.54
GDM: EMedMom 1M 1546 0.61% 0.76 59.4% 83% 0.11% 6.9% 0.15 0.14% 3.4% 0.51
GDM: EMaxMom 1M 1542 0.49% 0.86 58.0% 88% 0.10% 5.9% 0.18 0.16% 3.4% 0.57
GDM: EMinMom 1M 1539 0.35% 0.45 57.5% 89% 0.06% 6.1% 0.08 0.16% 3.1% 0.61
GEM: EMeanMom 1M 705 2.67% 5.53 68.6% 77% 1.01% 9.1% 1.36 0.48% 5.9% 0.97
GEM: EMedMom 1M 701 1.78% 2.56 60.9% 83% 0.45% 8.7% 0.59 0.16% 5.5% 0.28
GEM: EMaxMom 1M 697 1.12% 2.85 56.5% 88% 0.47% 8.2% 0.66 0.20% 5.8% 0.38
GEM: EMinMom 1M 695 1.48% 3.97 60.9% 90% 0.60% 7.6% 0.95 0.22% 5.2% 0.49
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Sector (GDM) Country (GEM) Neutralized, FY1 estimates, Long-Short decile portfolios.
Test period: Dec '98 – March ‘16.
We also tested the performance EMinMom and EMaxMom in the left-skewed and
right-skewed sub-universes of GDM and GEM, and found that the skew can
influence the effectiveness of these factors, but not enough so to warrant using them
over the conventional EMeanMom.
18
(852) 2800-8530 09 May 2016
Skew – Looking beyond the mean

The Skew of estimates itself is a very interesting factor to study. We find that it
behaves very differently than other Earnings factors and more like a Quality factor.
How we calculate skew

We attempted to use simple metrics to estimate skewness based on the mean,
median, high, low, and standard deviation of EPS estimates, as these numbers are
readily available from IBES. The most consistent method that we found was to
calculate the position of the average estimate relative to the lowest and highest
estimates:
−
≈ =
−
Keep in mind that while there are more advanced methods that can more accurately
measure skewness, the position of the mean serves as a nice proxy, particularly given
the ease of accessing these summary statistics from IBES.
One nice feature of the Skewness factor is that it has much lower turnover than
Earnings Momentum. We also find that the tradeoff when neutralizing skewness is
balanced between risk and return, so depending on whether the goal is to maximize
returns or minimize volatility, the choice of whether to neutralize or not can be made.
Figure 22: MSCI GDM – Skewness (mean position)

Std Avg Std
Avg Avg T- Hit Turn Avg
Factor Dev Sharpe Ret Dev IR
Skewness (mean position) – Free 1491 0.30% 2.58 58.0% 24% 0.33% 6.4% 0.60 0.17% 3.5% 0.72
Skewness (mean position) – Sector Neutral 1491 0.78% 2.55 58.9% 29% 0.27% 5.3% 0.60 0.10% 3.3% 0.47
Skewness, mean position (free): Max DD -18.6%, recent Sharpe: 1.55 Skewness, mean position (sector neutral)
200 0% 200 0%
180 -10% 180 -10%
160 -20% 160 -20%
140 -30% 140 -30%
120 -40% 120 -40%
100 -50% 100 -50%
80 -60% 80 -60%
60 -70% 60 -70%
40 -80% 40 -80%
20 -90% 20 -90%
0 -100% 0 -100%
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Skewness, mean position (free): Factor Beta Skewness, mean position (sector neutral): Factor Beta
8% 8%
6% 6%
4% 4%
L-S Factor Return
L-S Factor Return
2% 2%
0% 0%
-2% -2%
-4% -4%
-6% -6%
-8% -8% y = -0.157x + 0.004

y = -0.206x + 0.005
R² = 0.294 R² = 0.249
-10% -10%
-25% -20% -15% -10% -5% 0% 5% 10% 15% 20% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20%
Market Return Market Return
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Long-Short decile portfolios. Test period: Dec 1998 – March 2016.
19
(852) 2800-8530 09 May 2016
The Skewness factor behaves In GDM, we see in the factor beta of Skewness that it is a defensive factor – when
more like a Quality factor than regressing the factor returns vs. the market, the slope is negative. We also see that
an Earnings factor the returns spiked during the GFC, and has been working very well since then. This
is very similar behavior that we see to other Quality factors (see our report “What is
Quality”, Ma et al). We also see that neutralization doesn’t really add much
improvement, and risk-adjusted returns are nearly the same.
In GEM, the Skewness factor is more market agnostic – when regressing factor
returns vs. the market returns, the slope is closer to 0. As with GDM, the factor has
also worked very well in recent years.
Neutralization helps with the terrible drawdowns in the early years of the backtest,
but dampens the alpha in more recent years. Overall, Skewness does not look that
impressive relative to the strong performance of other Earnings factors in GEM, but
compared to lower alpha but defensive Quality factors, it looks quite attractive.
Figure 23: MSCI GEM – Skewness (mean position)

Std Avg Std
Skewness (mean position) – Free 607 1.04% 2.05 65.7% 17% 0.55% 13.5% 0.43 0.22% 11.3% 0.23
Skewness (mean position) – Country neutral 607 1.33% 2.17 58.0% 24% 0.40% 9.2% 0.49 0.25% 4.5% 0.78
Skewness, mean position (free): Max DD -42.0% Skewness, mean position (country neutral): Max DD: -24.0%
300 0% 300 0%
-10% -10%
250 250
-20% -20%
-30% -30%
200 200
-40% -40%
150 -50% 150 -50%
-60% -60%
100 100
-70% -70%
-80% -80%
50 50
-90% -90%
0 -100% 0 -100%
Base
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Skewness, mean position (free): Factor Beta: Skewness, mean position (sector neutral): Factor Beta
20% 20%
15% 15%
10% 10%
L-S Factor Return
L-S Factor Return
5% 5%
0% 0%
-5% -5%
-10% -10%
-15% y = -0.069x + 0.006 -15% y = -0.031x + 0.004

R² = 0.014 R² = 0.006
-20% -20%
-30% -20% -10% 0% 10% 20% 30% -30% -20% -10% 0% 10% 20% 30%
Market Return Market Return
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Long-Short decile portfolios. Test period: Dec 1998 – March 2016.
20
(852) 2800-8530 09 May 2016
Earnings Momentum performs better in a left skew universe

Investors pay more attention to Knowing that Skewness makes a difference in a stocks returns, we decided to test the
analysts in stocks with a left performance of Earnings Momentum by partitioning the universe by Skewness, just
skewed earnings forecast as we did when we partitioned by estimate count.
distribution. This may be due to
loss aversion - they are more
sensitive to potential analyst Below, we see that in both GDM and GEM, Earnings Momentum performs better in
revisions that could indicate a a left skewed universe vs. a right skewed universe, with both higher absolute returns
new direction for the herd as well as lower volatility.
In GDM, it’s largely due to the long side – that is, it’s more powerful when analysts
are revising their estimates upwards for stocks which have estimates that are left
skewed. In GEM, it’s equally powerful from both the long and the short sides.
Figure 24: Earnings Momentum in Left Skewed vs. Right Skewed Universe
Std Avg Std
GDM: EMom 1M (Left Skewed Universe) 138 0.51% 1.81 55.1% 88% 0.36% 10.0% 0.39 0.30% 6.2% 0.59
GDM: EMom 1M (Right Skewed Universe) 138 1.48% 1.46 51.7% 77% 0.31% 10.4% 0.30 0.01% 6.0% 0.00
GEM: EMom 1M (Left Skewed Universe) 116 3.34% 4.52 65.7% 85% 0.99% 10.9% 1.09 0.45% 6.6% 0.87
GEM: EMom 1M (Right Skewed Universe) 116 2.34% 2.05 59.9% 77% 0.56% 13.6% 0.44 0.22% 8.4% 0.30
GDM: 1M EMOM – Left skewed universe GDM: 1M EMOM – Right skewed universe
250 0% 250 0%
-10% -10%
200 -20% 200 -20%
-30% -30%
150 -40% 150 -40%
-50% -50%
100 -60% 100 -60%
-70% -70%
50 -80% 50 -80%
-90% -90%
0 -100% 0 -100%
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
GEM: 1M EMOM – Left skewed universe GEM: 1M EMOM – Right skewed universe
800 0% 800 0%
700 -10% 700 -10%

-20% -20%
600 600
-30% -30%
500 -40% 500 -40%
400 -50% 400 -50%
300 -60% 300 -60%

-70% -70%
200 200
-80% -80%
100 -90% 100 -90%
0 -100% 0 -100%
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Sector (GDM) Country (GEM) Neutralized, Long-Short quintile portfolios, using FY1 estimates and
minimum coverage of 3 analysts. Test period: Dec 1998 – March 2016.
21
(852) 2800-8530 09 May 2016
As we found that Earnings

factors have a difficult time in Building a better Composite Earnings
the broader GDM, we find it more
productive to examine the key factor by region
sub-regions within the
developed markets.
MSCI US vs. Russell 3000
We can see that earnings factors generally have a very poor performance in MSCI
Boosted by the Size effect and US, while in Russell 3000 we see quite a reasonable performance – the Size effect is
broader universe, Earnings clearly beneficial here, as is the larger universe. Only Net Revisions (relative to total
factors outperform in Russell changes) had a similar performance in both MSCI US and Russell 3000. Besides the
3000 over MSCI US. Earnings factors in the table below, we tested a number of other Earnings factors which
factors in Russell 3000 work consistently performed better in Russell 3000 over MSCI US. Also notably, the
particularly well on the long Earnings factors in Russell 3000 had stronger performance from the long side than
side.
the short side, hence the higher Information Ratios relative to the Sharpe ratios.
Figure 25: Earnings factors in MSCI US vs. Russell 3000

Std Avg
Avg T- Hit Turn Avg Std Dev
Factor Avg IC Dev Sharpe Ret IR
Stocks Stat Rate Over Ret LS Active
Ret LS Active
MSCI US – Earnings Momentum 1M 507 0.01% -0.42 54.6% 76% -0.11% 12.7% -0.16 0.09% 7.1% 0.14
MSCI US – Net Earnings Revisions (rel chgs) 504 0.70% 1.88 57.5% 74% 0.36% 9.5% 0.41 0.17% 6.3% 0.39
MSCI US – Recommendation Changes 1M 511 -0.28% -0.09 53.6% 89% -0.01% 7.7% -0.06 0.04% 5.2% 0.09
MSCI US – Composite Earnings 508 0.38% -0.32 54.6% 65% -0.07% 11.2% -0.13 -0.07% 6.0% -0.14
Russell 3000 – Earnings Momentum 1M 2566 0.95% 1.46 61.4% 79% 0.31% 10.4% 0.30 0.20% 4.5% 0.50
Russell 3000 – Net Earnings Revisions (rel chgs) 2567 0.85% 1.94 57.5% 78% 0.30% 7.7% 0.43 0.19% 5.5% 0.53
Russell 3000 – Recommendation Changes 1M 2673 0.74% 2.97 64.3% 89% 0.34% 5.8% 0.70 0.21% 3.6% 0.78
Russell 3000 – Composite Earnings 2587 1.22% 2.26 61.4% 75% 0.47% 10.4% 0.50 0.33% 5.1% 0.89
Earnings Momentum 1M Net Earnings Revisions (relative to total changes)
300 300
250 250
200 200 MSCI US, 194

Russell 3000, Russell 3000,
171 176
150 150
100 100
MSCI US, 70
50 50
0 0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Recommendation Changes 1M Composite Earnings

300 300
250 250 Russell 3000,

241
200 Russell 3000, 200
198
150 150
100 100
MSCI US, 92
MSCI US, 77
50 50
0 0
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Long-Short decile portfolios, Sector Neutralized. Test period: Dec 1998 – March 2016.
22
(852) 2800-8530 09 May 2016
MSCI US and Russell 3000 – Improved Composite Earnings

MSCI US Composite Earnings: We admit we had to try harder in MSCI US to build a Composite Earnings factor
- Net Revisions (rel to chgs) with reasonable performance, and had to necessarily look to other factors other than
- Skewness (mean position) our usual building blocks. Nevertheless, it’s a big improvement over the existing
- Upside to Target Price
Composite Earnings factor that had a negative Sharpe ratio. Earnings Momentum in
Russell 3000 Composite Earnings: particular performs very poorly in MSCI US, so we had to remove it from the
- Net Revisions (rel to chgs) composite.
- Rec Changes 1M
- Rec Changes 3M On the other hand, Russell 3000 was much simpler to build an improved Earnings
Composite. Again, Earnings Momentum was a mediocre performer, so we stayed
with Recommendation Changes (both the 1M and 3M variety) and Net Revisions.
Figure 26: Modified Composite Earnings – MSCI US and Russell 3000

Std
Avg Std
Avg T- Hit Turn Avg Ret Dev
Factor Avg IC Sharpe Ret Dev IR
Stocks Stat Rate Over LS Ret
Active Active
LS
MSCI US
New Composite Earnings (equal weight) 527 1.57% 3.04 59.4% 52% 0.58% 9.4% 0.71 0.38% 6.6% 0.65
– Net Revisions (relative to changes) 504 0.70% 1.88 57.5% 74% 0.36% 9.5% 0.41 0.17% 6.3% 0.39
– Skewness (mean position) 498 1.02% 2.13 57.0% 34% 0.32% 7.4% 0.48 0.22% 5.0% 0.59
– Upside to Target Price (median) 506 1.09% 1.35 53.4% 42% 0.53% 19.2% 0.24 0.31% 13.6% 0.10
Russell 3000
New Composite Earnings (equal weight) 2674 0.97% 4.00 66.2% 69% 0.54% 6.8% 0.96 0.30% 4.0% 1.03
– Recommendation Changes 1M 2673 0.74% 2.97 64.3% 89% 0.34% 5.8% 0.70 0.21% 3.3% 0.78
– Recommendation Changes 3M 2648 1.04% 2.72 62.3% 46% 0.45% 8.2% 0.63 0.25% 4.1% 0.79
MSCI US – Modified Composite Earnings Russell 3000 – Modified Composite Earnings

350 0% 350 0%
-10% -10%
300 300
-20% -20%
250 -30% 250 -30%
-40% -40%
200 200
-50% -50%
150 150
-60% -60%
100 -70% 100 -70%

-80% -80%
50 50
-90% -90%
0 -100% 0 -100%
Base
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Long-Short decile portfolios, Sector Neutralized. Test period: Dec 1998 – March 2016.
23
(852) 2800-8530 09 May 2016
MSCI Europe – Worthwhile to neutralize on Beta and Size

MSCI Europe Earnings Composite: In Europe, we combine some of the best performing Earnings factors and build a
- Net Revisions (rel to chgs) respectably performing Composite Earnings and more than double the Sharpe and
- Rec Changes (avg 1M & 3M) Information Ratios of the old Composite Earnings factor.
- Earnings Momentum 3M (risk adj.)
- Net Revisions to Target Price
- Skewness (mean position) In Europe, we also find that either Beta neutralization or Size neutralization (using
sector neutralized inputs and segmentation into quintile neutralization buckets) is
actually more effective than only Sector neutralization.
Figure 27: MSCI Europe – Modified Composite Earnings

Std
Avg Std
Avg T- Hit Turn Avg Ret Dev
Factor Avg IC Sharpe Ret Dev IR
Stocks Stat Rate Over LS Ret
Active Active
LS
New Composite Earnings (EW, sector neutral) 519 2.96% 3.19 62.3% 57% 0.74% 11.6% 0.74 0.41% 5.7% 1.02
New Composite Earnings (EW, beta neutral) 481 2.89% 3.95 63.8% 57% 0.74% 9.4% 0.94 0.34% 4.9% 0.95
New Composite Earnings (EW, size neutral) 481 2.90% 3.81 66.2% 56% 0.81% 10.5% 0.90 0.35% 5.8% 0.84
Old Composite Earnings (EW, sector neutral) 486 2.10% 1.56 58.9% 75% 0.34% 10.7% 0.33 0.19% 6.0% 0.45
– Recommendation Changes (avg 1M & 3M) 488 0.99% 2.31 57.5% 62% 0.37% 7.9% 0.53 0.25% 4.5% 0.69
– Earnings Momentum 3M (risk adj.) 478 2.21% 1.45 56.0% 44% 0.34% 11.7% 0.29 0.17% 6.7% 0.38
– Net Revisions to Target Price 445 2.20% 2.11 56.3% 75% 0.54% 11.4% 0.52 0.21% 7.0% 0.42
– Skewness (mean position) 479 0.95% 1.88 56.5% 28% 0.31% 8.3% 0.42 0.08% 5.0% 0.28
MSCI Europe – Modified Composite Earnings (Sector Neutral) MSCI Europe – Modified Composite Earnings (Beta Neutral)
500 0% 500 0%
450 -10% 450 -10%
400 -20% 400 -20%
350 -30% 350 -30%
300 -40% 300 -40%
250 -50% 250 -50%
200 -60% 200 -60%
150 -70% 150 -70%
100 -80% 100 -80%
50 -90% 50 -90%
0 -100% 0 -100%
Base
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
MSCI Europe – Modified Composite Earnings (Size Neutral) MSCI Europe – Old Composite Earnings (Sector Neutral)
500 0% 500 0%
450 -10% 450 -10%
400 -20% 400 -20%
350 -30% 350 -30%
300 -40% 300 -40%
250 -50% 250 -50%
200 -60% 200 -60%
150 -70% 150 -70%
100 -80% 100 -80%
50 -90% 50 -90%
0 -100% 0 -100%
Base
Base
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Long-Short decile portfolios, Sector Neutralized unless otherwise specified. Size and Beta neutralization
using a segmentation of 5 buckets. Test period: Dec 1998 – March 2016.
24
(852) 2800-8530 09 May 2016
MSCI Japan – Keep an eye on the target… price

MSCI Japan Earnings Composite: MSCI Japan is another difficult market for Earnings factors. Most of the Earnings
- Net Revisions (rel. to chgs) factors we tested had Sharpe ratios close to 0. The welcome exception to this was
- Upside to Target Price (low) the trusty Net Revisions (relative to changes). Also, somewhat surprisingly Target
Price factors actually perform relatively well in Japan. Upside to Target Price
(lowest) in particular performed well, with a Sharpe of 0.66 and Information Ratio of
0.72. It has performed even better in the most recent 3 years, with a Sharpe of 1.03
and Information Ratio of 1.22
We blend Net Revisions (relative to changes) and Upside to Target Price (lowest) for
our new Composite Earnings factor for Japan. This factor has a Sharpe ratio of 0.94
and Information ratio of 0.78, better than the sum of its parts. It performs fairly
consistently except for large drawdowns during the collapse of the Technology
bubble and the Global Financial Crisis.
Figure 28: MSCI Japan – Upside to Target Price actually works in japan
Std Avg Std
New Composite Earnings (EW, sector neutral) 329 2.46% 3.93 61.8% 70% 0.75% 9.6% 0.94 0.40% 6.2% 0.78
– Upside to Target Price (low) 320 2.46% 2.55 61.3% 42% 0.57% 10.0% 0.66 0.39% 6.4% 0.72
Upside to Target Price (high) 320 1.03% 1.17 55.8% 32% 0.38% 14.5% 0.25 0.18% 8.9% 0.15
Upside to Target Price (median) 320 2.20% 1.82 55.2% 42% 0.55% 13.3% 0.44 0.22% 8.3% 0.23
Upside to Target Price (mean) 320 2.16% 1.65 54.6% 40% 0.52% 13.9% 0.39 0.24% 8.7% 0.23
MSCI Japan: Modified Composite Earnings Upside to Target Price (low)
500 0% 500 0%
450 -10% 450 -10%
400 -20% 400 -20%
350 -30% 350 -30%
300 -40% 300 -40%
250 -50% 250 -50%
200 -60% 200 -60%
150 -70% 150 -70%
100 -80% 100 -80%
50 -90% 50 -90%
0 -100% 0 -100%
Base
Base
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: MSCI Barra, Thomson Reuters, J.P. Morgan Quantitative and Derivative Strategy. Long-Short decile portfolios.
IBES target price summary data only includes targets with 12-month time horizons. Test period: Aug 2002 – March 2016.
25
(852) 2800-8530 09 May 2016
Key Conclusions
 Earnings factors derive their power from measuring sentiment through the change
in expectations over a period of time, rather than the expectation level itself – this
is why it’s a type of fundamental momentum.
 Analysts are very good at identifying relative changes in sentiment, but poor at
picking absolute winners and losers.
 Looking at analysts revisions in aggregate is a poor backward looking signal for
market timing. But looking at analysts relative revisions on single stocks is
forward locking and a good signal for picking stocks.
 There is strong monthly seasonality of Earnings factors in June, right before the
peak of the earnings reporting season in July. Earnings factors show weak
efficacy during the months of December, January, and February due to the
holiday seasons, new annual risk budgets for portfolio managers, and strong
seasonality of other factors such as Price Momentum and Value (the “January
effect”).
 Net Revisions (relative to the number of changes) is the most consistent factor
across the global universe
 Earnings Momentum and Net Revisions work better in small caps, and
Recommendation Changes works better in large caps. This Size effect is the
same in both GDM and GEM.
 Size is highly correlated with analyst coverage in both GDM and GEM. In GEM,
coverage dominates size as earnings factors all work better with higher coverage
(which tend to be larger caps), especially Recommendation Changes (which
works better in large caps as well). Thus we can dynamically adjust the weight
on Recommendation Changes based on coverage to improve the performance of
Composite Earnings in GEM.
 In GDM, the Size effect is more powerful and Earnings Momentum and Net
Revisions are more effective in low coverage space.
 The Earnings Momentum of the most bullish or most bearish analyst is not as
powerful as the traditional mean consensus estimate.
 We approximate the skew of the distribution of analyst forecasted estimates using
a simple position of mean relative to the minimum and maximum estimate. As a
factor, Skewness shows Quality-like characteristics yet outperforms many other
Quality factors. Earnings Momentum performs better in a left skewed universe.
 In the combined GDM universe, it’s difficult to Earnings factors to work well as
they behave differently in the sub-regions. It’s much more effective to target
Earnings factors in each of the regions – US, Europe, and Japan.
 In GEM, our standard Composite Earnings factor that we developed more than 10
years ago as a part of the Q-Score balanced multi-factor model remains our gold
standard and continues to work well out-of-sample.
26
(852) 2800-8530 09 May 2016
Appendix: Earnings factor definitions
Earnings / Sentiment Factors Definition

Forward Earnings Momentum (1-Mth Change) Ranking by 1-mth change in consensus mean 1-yr forward earnings estimates.
Stocks with highest upward revisions are allocated to the top portfolio.
Forward Earnings Momentum (3-Mth Change) Ranking by 3-mth change in consensus mean 1-yr forward earnings estimates.
Stocks with highest upward revisions are allocated to the top portfolio.
Forward Earnings Momentum (3-Mth Change) / Ranking by 3-mth change in consensus mean 1-yr forward earnings estimates, risk
Coefficient Of Variation adjusted. Stocks with highest upward revisions are allocated to the top portfolio.
Net Revisions Ranking by net revisions to estimates, relative to total analysts (#Estimates Up -
#Estimates Down) / (#Total Estimates). Stocks with highest upward revisions are
allocated to the top portfolio.
Net Revisions (Relative To Total Changes) Ranking by net revisions to earnings estimates, relative to total number of changes
(#Estimates Up - #Estimates Down) / (#Estimates Up + #Estimates Down). Stocks
with highest upward revisions are allocated to the top portfolio.
1-Mth Change in Consensus Recommendations Ranking by 1-mth change in consensus analyst recommendations (1=Strong Buy,
5=Strong Sell). Stocks with the highest upward recommendation change are
3-Mth Change in Consensus Recommendations Ranking by 3-mth change in consensus analyst recommendations (1=Strong Buy,
5=Strong Sell). Stocks with the highest upward recommendation change are
Consensus Recommendations Ranking by consensus analyst recommendations on a 1-5 scale, where 1 is a
Strong Buy and 5 is a Strong Sell. Stocks with the highest recommendation are
Upside to Target Price Ranking by percent difference between the current share price and the consensus
analyst target price. Stocks with highest positive upside to target price are allocated
to the top portfolio.
Number of Consensus Estimates (FY1) Ranking by the number of consensus FY1 EPS estimates. Stocks with the highest
coverage are allocated to the top portfolio.
Source: J.P. Morgan Quantitative and Derivative Strategy
27
(852) 2800-8530 09 May 2016
Contacts
Global Quantitative and Derivatives Strategy
Marko Kolanovic (Global Head)
Equity Derivatives & Delta One Strategy

Marko Kolanovic (Global/Americas) mkolanovic@jpmorgan.com + 1 (212) 272-1438
Bram Kaplan (Americas) bram.kaplan@jpmorgan.com + 1 (212) 272-1215
AJ Mehra (Americas) arjun.mehra@jpmorgan.com + 1 (212) 622-8030
Davide Silvestrini (EMEA) davide.silvestrini@jpmorgan.com + 44 (20) 7134-4082
Peng Cheng (EMEA) peng.cheng@jpmorgan.com + 44 (20) 7134-4129
Anders Armelius (EMEA) anders.armelius@jpmorgan.com + 44 (20) 7134-6457
Tony Lee (Asia Pacific) tony.sk.lee@jpmorgan.com + (852) 2800-8857
Michiro Naito (Asia Pacific) michiro.naito@jpmorgan.com + (813) 6736-1352
Sue Lee (Asia Pacific) sue.sj.lee@jpmorgan.com + (852) 2800-7898
Haoshun Liu (Asia Pacific) haoshun.liu@jpmorgan.com + (852) 2800-7736
Quantitative Strategy
Dubravko Lakos-Bujas (Global/Americas) dubravko.lakos-bujas@jpmorgan.com + 1 (212) 622-3601
Narendra Singh (Americas) narendra.x.singh@jpmorgan.com + 1 (212) 622-0087
Khuram Chaudhry (EMEA) khuram.s.chaudhry@jpmorgan.com + 44 (20) 7742-8890
Viquar Shaikh (EMEA) viquar.x.shaikh@jpmorgan.com + 44 (20) 7134-5908
Ayub Hanif (EMEA) ayub.hanif@jpmorgan.com + 44 (20) 7742-5620
Robert Smith (Asia Pacific) robert.z.smith@jpmorgan.com + (852) 2800-8569
Christopher Ma (Asia Pacific) christopher.x.ma@jpmorgan.com + (852) 2800-8530
Berowne Hlavaty (Asia Pacific) berowne.d.hlavaty@jpmorgan.com + (612) 9003-8602
Michiro Naito (Asia Pacific) michiro.naito@jpmorgan.com + (813) 6736-1352
US Equity Strategy
Dubravko Lakos-Bujas dubravko.lakos-bujas@jpmorgan.com + 1 (212) 622-3601
Bhupinder Singh bhupinder.singh@jpmorgan.com + 1 (212) 622-9812
Scott Linstone scott.a.linstone@jpmorgan.com + 1 (212) 622-9970
Index and Program Trading Research

Min Moon (Americas) min.k.moon@jpmorgan.com + 1 (212) 272-8456
Rahil Iqbal (EMEA) rahil.iqbal@jpmorgan.com + 44 (20) 7742-4233
Sue Lee (Asia Pacific) sue.sj.lee@jpmorgan.com + (852) 2800-7898
He Zhang (Asia Pacific) he.zhang@jpmorgan.com + (852) 2800-7897
Rule-based and Cross-Asset Investment Strategies

Marko Kolanovic mkolanovic@jpmorgan.com + 1 (212) 272-1438
India Global Research Center

Pankaj Gupta Rahul Dalmia
Arfi Khan Priyanka Saraf
Vivek Shah Aditi Jhunjhunwala
Arun Jain Harshit Gupta
Ashwani Gupta
28
(852) 2800-8530 09 May 2016
Disclosures
This report is a product of the research department's Global Quantitative and Derivatives Strategy group. Views expressed may differ
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Overweight Neutral Underweight
(buy) (hold) (sell)
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29
(852) 2800-8530 09 May 2016
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Narendra Singh Americas

Earnings factors: Fundamental momentum

Figure 2: Q-Score: Factor families and components

PRICE MOMENTUM [20%] QUALITY [20%]

Figure 3: MSCI GEM: Composite Earnings and component factors

Extended to a global universe, we find that Earnings factors

350 -10% 350 -10%

150 -60% 150 -60%

1M Recommendation Changes Composite Earnings

350 -10% 350 -10%

150 -60% 150 -60%

But isn’t Earnings Momentum just Price Momentum in

Correlation of 6M Price Momentum and Net Revisions

Figure 7: MSCI AC World – Net Revisions handily outperforms Price Momentum

revisions on single stocks is 250

What if we neutralize Price Momentum from Revisions?

Analysts are a good measure of sentiment though changes

Figure 9: MSCI AC World – Recommendations vs. Recommendation Changes

In summary, an effective Earnings factor attempts to capture market sentiment

Monthly Seasonality – Pay attention in June!

Figure 11: Earnings announcement date histogram (past 10 years)

Source: J.P. Morgan Quantitative and Derivative Strategy, MSCI, Bloomberg.

Performance of key Earnings factors

MSCI GDM – Nothing but Net Revisions

1M Recommendation Changes Composite Earnings

MSCI GEM – The blend again is your friend

Figure 13: MSCI GEM – Standard Earnings Factors

1,600 -10% 1,600 -10%

1,400 -20% 1,400 -20%

1M Recommendation Changes Composite Earnings

1,600 -10% 1,600 -10%

1,400 -20% 1,400 -20%

Size matters, especially to Earnings

Size highly correlated with analyst coverage

Looking at the time series of cross-sectional correlations between the Z-scored

Figure 15: MSCI GDM – Correlation of Estimate Count and Size

Figure 16: MSCI GEM – Correlation of Estimate Count and Size

Analyst coverage – the more the merrier?

Table 1: MSCI AC World – Analyst coverage by country as of March 31, 2016

MSCI GDM MSCI GDM 1635 17.2 8.3 1 52

MSCI GEM MSCI GEM 812 15.9 8.9 1 51

MSCI GEM – Coverage dominates Size effect

400 400 Low, 416

1M Recommendation Changes Composite Earnings

400 800 Low, 712

200 Low, 193 400

MSCI GEM – Improving Composite Earnings by adjusting

Figure 19: Composite Earnings boosted by coverage

Coverage Weighted Equal Weighted

MSCI GDM – Size dominates Coverage

1M Earnings Momentum Net Earnings Revisions (relative to changes)

1M Recommendation Changes Composite Earnings

Distribution of estimates - the coolness of

Min/Max estimates – is it worth listening to the most

Skew – Looking beyond the mean

How we calculate skew

Figure 22: MSCI GDM – Skewness (mean position)

L-S Factor Return

-8% -8% y = -0.157x + 0.004

Figure 23: MSCI GEM – Skewness (mean position)

L-S Factor Return