The cross-section of industry equity returns and global tactical asset allocation across regions and industries

This study investigates which index characteristics predict returns in the cross-section of local industry indexes in six regions. The results show that geographical origin and market capitalization of indexes critically determine the predictive ability of characteristics. We find that industry indexes of any market capitalization with high earnings-to-price ratio yield higher expected returns in the US, Europe, and Asia-Pacific. Recent winner (loser) portfolios in Europe have a tendency to outperform (underperform) recent loser (winner) portfolios in the near future for all groups of market capitalization. Small portfolios with high idiosyncratic volatility in Asia-Pacific earn an idiosyncratic volatility premium. Dividend yield is positively related to future returns of small European portfolios. These results are robust to the inclusion of transaction costs and control variables and have implications for portfolio managers following a global tactical asset allocation policy. •We test which index characteristics predict industry returns in the cross-section.•Geographical origin and market cap. of indexes matter for this predictive relation.•High-EP indexes yield higher expected returns in the US, Europe, and Asia-Pacific.•The momentum effect is detected in returns of European portfolios of any market cap.•Small portfolios with high idiosyncratic volatility in Asia-Pacific earn a premium.