SA equities: Momentum continues to be crushed

SA equities: Momentum continues to be crushed

The markets have definitely changed. The low volatility, easy monetary policy and search for yield proved to be a boon for momentum stocks. Going long high momentum and short low momentum stocks had almost become a staple trade for many. Momentum, however, has been crushed in 2016 and in turn that trade has now reversed.

high-low-momentum

In South Africa the resurgence in value stocks started with the strong run up in resource stocks, however, it would be wrong to assume that the rise in value (and fall in momentum) is only due to resource stocks. In our value portfolios the bulk of our allocation was actually within the industrial sector and we, surprisingly, held few resource counters. This view is backed up by the recent article in Moneyweb; Value vs growth – are we at an inflection point? . Cannon Asset Managers’ Super Dogs portfolio has no resources and yet managed to be up 8% YTD against a FINDI Index which is down c.7%.

Where I disagree with the article is whether we actually are at an inflection point. No. We’re way past that point. The value strategy has started to work again (at least in South Africa) and has been outperforming the market for the past 12 months at least. The stocks that banked you outperformance in the past with their low volatility, high momentum characteristics are just not cutting it anymore.

momentum-value

So where to from here? My view is that value continues to outperform, probably at a lower rate as more and more investors get hurt by a tilt towards a high momentum strategy and start switching to value.

Momentum strategies do not like volatility. Value strategies on the other hand love volatility. And volatility is on the rise.

momentum-vol

So to are short-term rates (although who knows for certain these days) and historically value strategies have outperformed the market when short-term rates rise.

Our third reason for favouring a continued run in value stocks is a model we have put together which attempts to estimate the return of a high momentum strategy vs. a high value strategy over the next 3 months. It’s strongly negative, indicating outperformance by a high value strategy over a high momentum strategy.

Momentum relative return

Although every effort is made to ensure accuracy in the data and analysis presented on this site, this cannot be guaranteed. Nothing on this site constitutes investment advice, nor should it be taken as such. And obviously, past results do not guarantee future performance.

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