Morgan Stanley Says Overreaction Bets Work Best in China
Morgan Stanley Quants Say Overreaction Bets Work Best in China
(Bloomberg) -- Betting on overreaction -- assuming that stocks move too far on new information and will reverse course -- is more successful in China than any other market, according to quantitative strategists at Morgan Stanley.
Reversals of the trend seen during the previous few months tend to beat momentum trading, analysts including head of Asia quantitative research Yinan Zhang wrote in a report dated May 28. While chasing recent winners has been a successful strategy in most markets, it doesn’t work so well in China over a 12-month period, they wrote.
“Retail investors tend to trade stocks on historical price trends and market rumors, a practice in China known as ‘stir-frying stocks,”’ the report said. New information tends to spur buying and selling by “rational speculators” who anticipate a stampede of “noise traders.”
Quant strategies are becoming increasingly common in China as the country gains wider inclusion in global benchmarks compiled by the likes of MSCI Inc., FTSE Russell and S&P Dow Jones Global Indices LLC. MSCI boosted the inclusion of Chinese domestic equities in its benchmarks this week. The Shanghai Shenzhen CSI 300 Index was down 0.8% at 3,635.14 at 2:20 p.m. Hong Kong time.
“The common perception is that retail investors tend to rely on price momentum, speculation and headlines rather than fundamentals when making investment decisions,” Morgan Stanley’s analysts wrote. “There could be more facets to retail investors’ behavioral bias, which lead to various unique trading patterns in China A-shares.”
To be sure, such a reversal strategy is more easily said than done -- restrictions against short-selling by foreigners make it difficult to bet against winners.
The reversal factor was consistent across all sectors and strongest for investors betting against performance trends observed during the previous one and three month periods, Morgan Stanley’s note said.
To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Sofia Horta e Costa
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