Asia Momentum at Level That Presaged Past Routs, Bernstein Says

(Bloomberg) -- If it has paid off in the past to bet on Asian stocks showing momentum, that strategy has now become too expensive.

That’s according to Sanford C. Bernstein’s Rupal Agarwal, who noted the valuation spread between winners and losers is at record levels -- much higher than in 2000 and 2008, when a “catastrophic” crash followed. Back then, the factor slumped 38% and 48%, respectively, over the next six months, the strategist wrote in a report Friday.

An MSCI gauge tracking momentum shares in Asia ex-Japan is outperforming the broader market this year, showing a decline of just 4% compared with a 13% slump in the regional index.

“Momentum is a late-cycle factor which tends to work well during times of expansion when the trend has been established and hence winners continue to be winners while losers continue to be losers,” Agarwal wrote. “During times of economic recession or recovery, momentum strategies underperform as the factor hates uncertainty.”

What qualifies as momentum has changed “drastically” and is no longer exclusively tech stocks, according to Bernstein. It’s also staples and health-care equities, and in China the factor remains positively exposed to discretionary shares, the note said.

High-momentum stocks in Asia and China seem to be those with high growth expectations, while low-momentum ones look like value shares, Agarwal said. The momentum factor faces headwinds from macro-economic conditions and investors should be cautious, she added.

“The markets are not yet pricing in the risk to high-momentum stocks, and we strongly caution against exposure to the factor,” Agarwal wrote.

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