The Cross-section of Industry Equity Returns and Global Tactical Asset Allocation across Regions and Industries

This study investigates the existence of a cross-sectional relationship between several index characteristics and future returns on country-industry indexes in six regions. The results from portfolio sorts and index-level cross-sectional regressions across regions collectively show that the geographical origin and size of indexes critically determine the existence of such a relationship. We find that country-industry indexes of any size with high earnings-to-price ratio yield higher expected returns in the US, Europe, and Asia-Pacific. Recent winner (loser) small-cap portfolios in North America and Asia-Pacific have a tendency to outperform (underperform) recent loser (winner) portfolios in the near future, while this kind of performance continuity is pervasive across all size groups of European portfolios. Small portfolios with high idiosyncratic volatility in Europe, Asia-Pacific, and Japan earn an idiosyncratic volatility premium. Dividend yield and short-term momentum are positively related to future returns of small European portfolios. Our results have implications for portfolio managers following a global tactical asset allocation policy