An investment strategy that attempts to profit off existing market trends is “doomed tactically” for Asian equities, according to Sanford C. Bernstein.
So-called momentum trading, which seeks to buy rising stocks and short downward-trending ones, will likely underperform regardless of the direction of markets or volatility, the brokerage says. It recommends investors reduce exposure to high-momentum shares.
“History is stacking up against momentum” in Asia, Bernstein analysts Rupal Agarwal and Anusha Madireddy wrote in a note. “The evidence for long-term momentum premium is weak in Asia –- the best momentum strategy has generated annualized returns of 6% in last 20 years,” they wrote.
Bernstein’s recommendation comes as strategies that make money riding cross-asset trends are getting whipsawed, with risky securities swaying from meltdowns to melt-ups due to the pandemic and policy makers’ efforts to contain the damage caused by it.
Momentum has generated a 28% return this year for a long-short strategy, the most among all factor styles on the top 2,000 companies in Asia Pacific, according to data compiled by Bloomberg.
“Recent spike in market volatility should work against momentum as it shines during rising markets with low vol,” the Bernstein analysts wrote.
