M IdeaAsia Quantitative Strategy | Asia PacificBiweekly Perspectives: Mind the Reversal Risk of Momentum Factor in Asia/EM"Price Momentum" factor has dominated alpha opportunities in Asia/EM YTD. We note that its outperformance is approaching extreme scenarios in history, and our quant model suggests taking profits from the factor. We illustrate our model takeaways from macro and market dynamic perspectives. M Morgan Stanley Asia Limited+Gilbert Wong, CFAQuantitative Strategist Gilbert.Wong@morganstanley.com +852 2848-7102 Jason Ng, CFAQuantitative Strategist Jason.Dl.Ng@morganstanley.com +852 2848-8845 Morgan Stanley Asia (Singapore) Pte.+Jonathan F GarnerEquity Strategist Jonathan.Garner@morganstanley.com +65 6834-8172 Daniel K BlakeEquity Strategist Daniel.Blake@morganstanley.com +65 6834-6597 Morgan Stanley Asia Limited+Crystal NgEquity Strategist Crystal.Ng@morganstanley.com +852 2239-1468 Exhibit 1 : Mean Reversal Risk of "Momentum Factor"-80%-60%-40%-20%0%20%40%60%Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21Jan-22Jan-23Jan-24Price Momentum Factor ReturnRolling 6M Cumulative Factor ReturnsThe outperformance of "Price Momentum factor" over last 6 months was an outlier in history. Source: FactSet, Morgan Stanley Research; data coverage: Jan-00 to Jan-24.What is Momentum factor? The simplified idea is that top-performing stocks in the past tend to outperform in the future. It is a market-neutral factor, being driven by systematic underreaction to new information. Such trading patterns are evident across the majority of markets and sectors. In normal times, Momentum factor delivers steady alpha to stock pickers, but it also exhibits strong mean-reversal tendencies if overshot ( Exhibit 1 ).Our latest observations and thoughts: Price Momentum factor has been outperforming in the last 12 months in Asia/EM, and it has accelerated YTD. The factor gained 16.1% and 9.4%, respectively, in APxJ/EM and Japan in the last six weeks, bringing its rolling returns to stand above 2-sigma level from the long-term average. As its factor volatility is on the rise concurrently, we believe the prudent strategy now would be to neutralize long exposure on Price Momentum factor. Meanwhile, our model also recognizes that a bear steepening UST yield curve also tends to drag return of Momentum factor in Asia/EM, because a tightened financial condition might bring fund outflows from Asia/EM, resulting in crowded trades unwinding and also the Momentum stocks. From a quant perspective, we suggest to only stay long with Quality stocks, and reiterate a neutral stance between Value and Growth via preferring High Dividend stocks and Quality Growth stocks concurrently. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a confli...
