Does Momentum Investing work in India

And can it outperform the broader markets consistently?

This post was first published on capitalmind.in

In Short

  • Contrary to how it might seem in financial media, momentum as an investment strategy has been around for the better part of a century.

  • Empirical studies going as far back as 1801 have shown momentum works, not just in equities, but across asset classes. Momentum outperforms broader markets.

  • Momentum outperforms benchmarks in India. We extensively backtest a momentum strategy against portfolios of randomly selected stocks, and against the benchmark indices.

  • But the outperformance comes at the cost of higher volatility and higher point-in-time drawdowns in the short-term. Stick with it though, and it does measurably better than the market.

  • Finally, we look at the basic momentum investing strategies (Simple vs GainLoss vs Volatility-Adjusted Momentum) to see if some consistently do better than others


What is Momentum Investing?

At its core, momentum investing is built on the simple premise that stocks that have gone up (down), will continue to go up (down), at least in the short term. Therefore, buying a portfolio of such (long up, short down) stocks should offer better returns than the broader market.

This idea is not new. It has been around for almost as long as organised investing has been around.

Momentum investing probably became mainstream in the early 90’s when a paper by two professors, Narasimham Jegadeesh and Sheridan Titman, at the time at University of California, was published in the Journal of Finance. The paper is called “Returns to buying winners and selling losers”, and tested NYSE stock returns from 1965 to 1989. At the time, they called it a “relative strength” strategy.

Not only that, evidence of momentum’s outperformance goes all the way back 212 years. Believe-it-or-not, to the year 1801.

If you consider the evidence, momentum investing has more hard data backing its persistence as a strategy for outperformance than any other school of investing thought, including value.

But surely India is different?

It’s all very well to have confirmed that momentum as a strategy works in developed markets like the US and Europe.

But does a strategy that buys winners purely based on price returns work in the Indian markets?

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